INCOME TAXES
The Tax Cuts and Jobs Act (the Tax Act) was signed into law on December 22, 2017. The Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. We recorded a charge of $3.1 million in deferred income tax expense for the re-measurement of our net deferred tax asset at the 21% rate. The Tax Act also provides for acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including additional limitations on deductibility of executive compensation, interest and employee meal benefits. Upon completion of our 2017 U.S. income tax return in 2018 we may identify additional re-measurement adjustments to our recorded deferred tax assets. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Tax Legislation for which measurement could be reasonably estimated. As the impact is based on currently available information and interpretations, which are continuing to evolve, the impact should be considered provisional. We will continue to analyze additional information and guidance related to the Tax Act as supplemental legislation, regulatory guidance or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of December 31, 2017. Pursuant to SAB 118, any adjustments to the provisional amounts recorded by the Company as of December 31, 2017 that are identified within a subsequent measurement period of up to one year from the enactment date will be included as an adjustment to tax expense from continuing operations in the period the amounts are determined.
The allocation of income taxes (benefit) for the fiscal year ended December 31, 2016 was determined based on pretax income and the outcome of a restructuring completed prior to the Spin-Off which effectively triggered a tax status change of the legal entities making up the Bagger Dave's business in a manner which enables the continuing business parent entity to retain the majority of the tax benefits from losses and credits. Following the status change, the Company contributed all of the hard assets and liabilities of the Bagger Dave's entities into a newly formed entity, Bagger Dave's Burger Tavern, Inc., the stock of which was ultimately spun-off to shareholders. The income tax benefit allocated to discontinued operations for 2016 related to benefits generated during the period between the date that the Company contributed the hard assets and liabilities of the Bagger Dave's entities to Bagger Dave's Burger Tavern, Inc. and the date that the Spin-Off was completed. A valuation allowance reserve was deemed necessary for the net deferred tax assets of Bagger Dave's Burger Tavern, Inc., and the resulting deferred tax expense was allocated to continuing operations as required by ASC 740.
The income tax provision (benefit) from continuing operations consists of the following components for the fiscal years ended December 31, 2017 and December 25, 2016:
|
| | | | | | | | |
| | Fiscal Years Ended |
| | December 31, 2017 | | December 25, 2016 |
Federal: | | | | |
Current | | $ | — |
| | $ | 19,911 |
|
Deferred | | 17,346,134 |
| | (1,823,443 | ) |
State: | | | | |
Current | | (10,000 | ) | | (81,500 | ) |
Deferred | | 1,661,622 |
| | (385,760 | ) |
Income tax provision (benefit) | | $ | 18,997,756 |
| | $ | (2,270,792 | ) |
The provision (benefit) for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income (loss) before income taxes. The items causing this difference are as follows:
|
| | | | | | | | |
| | Fiscal Years Ended |
| | December 31, 2017 | | December 25, 2016 |
Income tax expense (benefit) at federal statutory rate | | $ | (437,374 | ) | | $ | 465,207 |
|
State income tax | | 1,651,622 |
| | 132,740 |
|
Permanent differences | | 506,867 |
| | 70,206 |
|
Tax credits | | (1,807,523 | ) | | (1,748,632 | ) |
Benefit resulting from restructuring | | — |
| | (3,016,513 | ) |
Change in valuation allowance | | 15,948,273 |
| | 1,826,200 |
|
Rate difference - reduction to 21% | | 3,135,891 |
| | — |
|
Income tax provision (benefit) | | $ | 18,997,756 |
| | $ | (2,270,792 | ) |
In accordance with the provisions of ASC 740, a valuation allowance is established when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. As a result of this evaluation, as of December 31, 2017, a valuation allowance of $15.9 million has been recorded because the Company is unable to assert that realization of the deferred tax asset is more likely than not. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income increase or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
On December 25, 2016 we completed the Spin-Off of Bagger Dave’s, which had previously generated significant pre-tax losses. After the Spin-Off, the majority of the net deferred tax assets were retained by the Company, which in its continuing operations had a history of profitability and was expected to continue to generate pre-tax income in the future. This expected operating performance combined with the planned opening of additional BWW restaurants was expected provide future taxable income that would enable the Company to utilize the tax benefits prior to their expirations. Given this information, there was no valuation allowance recorded for the fiscal year ended December 25, 2016. While there was no allowance recorded against the deferred tax assets of the continuing operations, the Company incurred a one-time charge against the benefit for income taxes of $1.8 million. This charge is the result of certain deferred tax assets relating to discontinued operations that were determined to be unrealizable by Bagger Dave's and is allocable to continuing operations as required by ASC 740.
Due to the restructuring involving a tax status change that occurred prior to the Spin-Off, the continuing operations retained tax benefits that were generated by discontinued operations amounting to $3.0 million for the fiscal year ended December 25, 2016.
Deferred income taxes reflect the net 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. Significant components of the Company's deferred income tax assets and liabilities are summarized as follows:
|
| | | | | | | | |
| | December 31, 2017 | | December 25, 2016 |
Deferred tax assets: | | | | |
Net operating loss carry-forwards | | $ | 6,798,685 |
| | $ | 11,223,494 |
|
Deferred rent expense | | 549,540 |
| | 752,897 |
|
Start-up costs | | 81,962 |
| | 129,152 |
|
Tax credit carry-forwards | | 8,366,915 |
| | 6,559,392 |
|
Interest rate swaps | | 90,112 |
| | 481,267 |
|
Sale leaseback deferred gain | | 314,598 |
| | 629,924 |
|
Share-based compensation | | 218,853 |
| | 239,925 |
|
Accrued closure liabilities | | — |
| | 36,432 |
|
Other | | 296,721 |
| | 967,812 |
|
Total deferred tax assets | | 16,717,386 |
| | 21,020,295 |
|
| |
| | |
Deferred tax liabilities: | | | | |
Tax depreciation in excess of book | | 881,810 |
| | 2,366,739 |
|
Goodwill amortization in excess of book | | 2,647,173 |
| | 2,402,628 |
|
Total deferred tax liabilities | | 3,528,983 |
| | 4,769,367 |
|
| | | | |
Net deferred income tax asset, before valuation allowance | | 13,188,403 |
| | 16,250,928 |
|
Valuation allowance on net deferred income tax assets | | (15,948,273 | ) | | — |
|
Net deferred income tax assets (liabilities) | | $ | (2,759,870 | ) | | $ | 16,250,928 |
|
As of December 31, 2017 and December 25, 2016, the Company has available federal and state net operating loss carryforwards of approximately $32.6 million and $33.0 million, respectively. General business tax credits of $8.4 million will expire between 2028 and 2037.
The Company applies the provisions of ASC 740 regarding the accounting for uncertainty in income taxes. There are no amounts recorded on the Company's consolidated financial statements for uncertain positions. The Company classifies all interest and penalties as income tax expense. There are no accrued interest amounts or penalties related to uncertain tax positions as of December 31, 2017.
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions, and is subject to U.S. Federal, state, and local income tax examinations for tax years 2013 through 2016. The Company is currently under IRS exam for the 2014 fiscal year.