MARCUS CORP

9. Income Taxes

The components of the net deferred tax liability are as follows:

	December 28, 2017		December 29, 2016
	(in thousands)
Accrued employee benefits	$	13,736	$	17,682
Depreciation and amortization		(55,466)		(67,897)
Other		3,497		3,782
Net deferred tax liability	$	(38,233)	$	(46,433)

The decrease in the Company’s net deferred tax liability is due to a $21,240,000 reduction in its net deferred tax liability resulting from the reduction in the corporate tax rate enacted in December 2017 under the Tax Cuts and Jobs Act of 2017. Excluding this favorable impact, the Company’s net deferred tax liability would have increased by $13,040,000.

Income tax expense consists of the following:

	Year Ended				31 Weeks Ended		Year Ended
	December 28, 2017		December 29, 2016		December 31, 2015		May 28, 2015
	(in thousands)
Current:
Federal	$	8,707	$	15,434	$	12,688	$	8,065
State		1,558		4,667		3,240		2,120
Deferred:
Federal		(7,155)		3,402		(829)		4,328
State		515		(509)		(314)		1,165
	$	3,625	$	22,994	$	14,785	$	15,678

Included in the deferred federal income tax amount is a $21,240,000 tax benefit related to the Tax Cut and Jobs Act of 2017.

The Company’s effective income tax rate, adjusted for earnings from noncontrolling interests, for fiscal 2017, fiscal 2016, the Transition Period and fiscal 2015 was 5.3%, 37.8%, 38.6% and 39.5%, respectively. The Company recorded a $21,240,000 tax benefit related to the reduction of its net deferred tax liability resulting from the reduction in the corporate tax rate enacted in December 2017 under the Tax Cuts and Jobs Act of 2017. Excluding this favorable impact, the Company's effective income tax rate for fiscal 2017 was 36.2%. The Company has not included the income tax expense or benefit related to the net earnings or loss attributable to noncontrolling interest in its income tax expense as the entities are considered pass-through entities and, as such, the income tax expense or benefit is attributable to its owners.

A reconciliation of the statutory federal tax rate to the effective tax rate on earnings attributable to The Marcus Corporation follows:

	Year Ended						31 Weeks Ended			Year Ended
	December 28, 2017			December 29, 2016			December 31, 2015			May 28, 2015
Statutory federal tax rate		35.0	%		35.0	%		35.0	%		35.0	%
Tax benefit from Tax Cuts and Jobs Act of 2017		(30.9)	%		–			–			–
State income taxes, net of federal income tax benefit		4.8			4.8			5.1			5.3
Tax credits, net of federal income tax benefit		(0.8)			(0.9)			(1.0)			(1.1)
Other		(2.8)			(1.1)			(0.5)			0.3
		5.3	%		37.8	%		38.6	%		39.5	%

Net income taxes paid in fiscal 2017, fiscal 2016, the Transition Period and fiscal 2015 totaled $23,691,000, $25,017,000, $8,270,000 and $10,918,000, respectively.

The Company was able to make a reasonable estimate of the impact of the Tax Cuts and Jobs Act of 2017, including the reduction in the corporate tax rate and the provisions related to executive compensation and 100% bonus depreciation on qualifying property. However, given the Act's broad and complex changes, further clarification, interpretation and regulatory guidance could affect the assumptions the Company used in making its reasonable estimate. Following the guidance of the U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 118, any adjustments to the Company’s estimate will be reported as a component of income tax expense in 2018 and disclosed in the period when any such adjustments have been determined within the one-year measurement period.

A reconciliation of the beginning and ending gross amounts of unrecognized tax benefit are as follows:

	Year Ended				31 Weeks Ended		Year Ended
	December 28, 2017		December 29, 2016		December 31, 2015		May 28, 2015
	(in thousands)
Balance at beginning of year	$	414	$	414	$	431	$	102
Increases due to:
Tax positions taken in prior years		-		-		-		543
Tax positions taken in current year		-		-		-		-
Decreases due to:
Tax positions taken in prior years		-		-		-		-
Settlements with taxing authorities		-		-		(17)		(214)
Lapse of applicable statute of limitations		(312)		-		-		-
Balance at end of year	$	102	$	414	$	414	$	431

The Company’s total unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate were $67,000 as of December 28, 2017, December 29, 2016, December 31, 2015 and May 28, 2015. At December 28, 2017, the Company had accrued interest of $54,000 and no accrued penalties, compared to accrued interest of $130,000 and no accrued penalties at December 29, 2016. The Company classifies interest and penalties relating to income taxes as income tax expense. For the year ended December 28, 2017, $50,000 of interest and no accrued penalties were recognized in the statement of earnings, compared to $153,000 of interest and no accrued penalties for the year ended December 29, 2016, $108,000 of interest and no accrued penalties for the Transition Period and $89,000 of interest and no accrued penalties for the year ended May 28, 2015.

The Company’s income tax return for the Transition Period is currently under examination by the Internal Revenue Service. During fiscal 2015, the Company settled an examination by the Internal Revenue Service of its income tax return for fiscal 2012. The Company's federal income tax returns are no longer subject to examination prior to fiscal 2015. With certain exceptions, the Company's state income tax returns are no longer subject to examination prior to fiscal 2014. At this time, the Company does not expect the results from any income tax audit or appeal to have a significant impact on the Company's financial statements.

The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.