Note 7. Income Taxes

The Company’s effective tax rate for the fiscal year ended January 2, 2026 differed from the U.S. federal statutory rate of 21% primarily due to state and local income taxes and changes in the valuation allowance. State and local taxes reflect taxes in jurisdictions in which the Company operates, net of the related federal benefit, and are primarily attributable to operations in California.

Nondeductible items include the impact of the limitation on executive compensation under IRC Section 162(m), incentive stock option expense for which no tax deduction is recognized unless a disqualifying disposition occurs, share-based compensation shortfalls, and nondeductible contingent consideration adjustments.

The Company evaluates the realizability of its deferred tax assets on a quarterly basis. Based on cumulative pre-tax losses and other objective negative evidence, the Company concluded that it is more likely than not that its deferred tax assets will not be realized and therefore maintains a full valuation allowance. The decrease in the valuation allowance was primarily the result of the changes in deferred tax assets provided in the table below. Current-year deferred taxes were fully offset by the corresponding change in the valuation allowance.

Deferred income taxes represent the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax liabilities and assets are as follows:

As of January 2, 2026 and January 3, 2025, gross deferred tax assets were $171 million and $178 million, respectively. The Company has recorded a valuation allowance of $164 million and $170 million as of January 2, 2026 and January 3, 2025, respectively. The Company has performed an assessment of positive and negative evidence, including the nature, frequency, and severity of cumulative financial reporting losses in recent years, the future reversal of existing temporary differences, predictability of future taxable income exclusive of reversing temporary differences of the character necessary to realize the asset, relevant carryforward periods, taxable income in carry-back years if carry-back is permitted under tax law, and prudent and feasible tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset that would otherwise expire. The change in the valuation allowance of $6 million was primarily driven by the generation of federal and state net operating losses.

The Company recognizes interest and penalties related to tax matters as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations.

At January 2, 2026, the Company had U.S. federal and state net operating loss (“NOL”) carryforwards of $199 million and $197 million, respectively. The U.S. federal NOL carryforward does not expire and can be carried forward indefinitely, but can only offset up to 80% of taxable income in future years. The state NOL carryforwards have both indefinite and limited carryforward periods, depending on state jurisdictions, and expire beginning in 2036 through 2043. At January 2, 2026, the Company had a full valuation allowance related to the tax-effected amount of these net operating losses. The Company had no unrecognized tax benefits recorded at January 2, 2026.

The Company files income tax returns in numerous tax jurisdictions, including the U.S. and multiple U.S. states. The statute of limitations generally ranges from three to five years for major jurisdictions in which the Company operates. Prior to the acquisition, Shimmick filed as a subsidiary of their parent company, AECOM. In connection with the separation, the Company entered into a tax matters agreement. Under the tax matters agreement, AECOM is generally responsible for all taxes associated with consolidated federal and state filings imposed on AECOM and its subsidiaries (including Shimmick) with respect to taxable periods ended on or prior to January 1, 2021. Also, pursuant to this agreement, AECOM is generally responsible for all taxes associated with separately filed state and local tax filings imposed on Shimmick and its subsidiaries with respect to taxable periods ended on or prior to January 1, 2021. Under these circumstances, Shimmick is only liable for tax periods filed on a standalone basis following the acquisition date.

On July 4, 2025, the President signed into law the One Big Beautiful Bill Act ("OBBBA"), which includes various modifications to federal tax law. Among its provisions, the legislation retroactively reinstates 100% bonus depreciation for qualified property placed in service on or after January 20, 2025. The Company evaluated the impact of the legislation and determined that, while the bonus depreciation provision may affect the timing of future taxable income and deferred taxes, the impact is fully offset by the Company’s valuation allowance and therefore does not affect income tax expense.