INCOME TAXES
The provision for income taxes for 2017, 2016 and 2015 consisted of the following (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current income tax expense: | | | | | |
Federal | $ | (436 | ) | | $ | (769 | ) | | $ | 503 |
|
State and local | 55 |
| | 59 |
| | 356 |
|
Total current income tax expense | (381 | ) | | (710 | ) | | 859 |
|
Deferred income tax (benefit) expense: | | | | | |
Federal | (1,023 | ) | | 55,818 |
| | (3,720 | ) |
State and local | 18 |
| | 2,725 |
| | (3 | ) |
Total deferred income tax (benefit) expense | (1,005 | ) | | 58,543 |
| | (3,723 | ) |
Total income tax (benefit) expense | $ | (1,386 | ) | | $ | 57,833 |
| | $ | (2,864 | ) |
Deferred income taxes as of December 31, 2017 and December 25, 2016 consisted of the following (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Goodwill for tax reporting purposes | $ | 7,532 |
| | $ | 14,825 |
|
Stock compensation | 310 |
| | 619 |
|
Self-insurance reserves | 1,812 |
| | 3,091 |
|
Depreciation and amortization | 22,203 |
| | 28,244 |
|
Business credit carryforwards | 39,574 |
| | 34,192 |
|
State and Federal net operating loss(1) | 2,121 |
| | 491 |
|
Other(1) | 853 |
| | 1,084 |
|
Total gross deferred tax assets | 74,405 |
| | 82,546 |
|
Deferred tax liabilities: | | | |
Indefinite-lived intangible assets | (373 | ) | | (489 | ) |
Prepaid assets | (179 | ) | | (170 | ) |
Deferred rent | (13,958 | ) | | (17,694 | ) |
Total gross deferred tax liabilities | (14,510 | ) | | (18,353 | ) |
Total deferred tax asset (liability) | $ | 59,895 |
| | $ | 64,193 |
|
Valuation Allowance | $ | (60,268 | ) | | $ | (64,682 | ) |
Net deferred tax (liability) asset | $ | (373 | ) | | $ | (489 | ) |
| | | |
(1)Certain reclassifications have been made to prior period amounts to conform to the current year presentation. |
Goodwill for tax reporting purposes is amortized over 15 years. At December 31, 2017, the Company had business credit carryforwards mainly consisting of Federal Insurance Contributions Act (FICA) tip credit carryforwards of $39.5 million and federal net operating loss carryforwards of $0.9 million, which will expire at various dates from 2030 through 2037. The Company's state net operating loss carryforwards of $1.2 million will expire at various dates from 2036 through 2037.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Both positive and negative evidence are considered in forming management’s judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. Due to the impairment charges recorded during 2017, 2016 and 2015, the Company is in a three-year cumulative loss position. According to ASC Topic No. 740, Income Taxes, cumulative losses in recent years represent significant negative evidence in considering whether deferred tax assets are realizable. Based on the required weight of that evidence under ASC 740, the Company has determined that a valuation allowance was needed for all of its net deferred income tax assets. As of December 31, 2017 and December 25, 2016, the Company recorded valuation allowances of $60.3 million and $64.7 million, respectively. As of December 27, 2015, the Company did not carry a valuation allowance against net deferred tax assets. The tax benefits relating to any reversal of the valuation allowance on the net deferred tax assets will be recognized as a reduction of future income tax expense.
The effective income tax expense differs from the federal statutory tax expense for the years ended December 31, 2017, December 25, 2016 and December 27, 2015, as follows (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Provision at statutory rate | $ | (3,904 | ) | | $ | (5,909 | ) | | $ | 601 |
|
FICA tip credit | (4,684 | ) | | (5,094 | ) | | (5,496 | ) |
State income taxes — net of federal benefit | 72 |
| | (405 | ) | | 158 |
|
Permanent items | 1,174 |
| | 4,559 |
| | 1,873 |
|
Deferred tax asset valuation allowance | (3,689 | ) | | 64,682 |
| | — |
|
Federal and state rate change | $ | 9,645 |
| | $ | — |
| | $ | — |
|
Total income tax (benefit) expense | $ | (1,386 | ) | | $ | 57,833 |
| | $ | (2,864 | ) |
The Company recognizes a position taken or expected to be taken on a tax return in the financial statements when it is more likely than not (i.e. a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Changes in judgment that result in subsequent recognition, derecognition, or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) is recognized as a discrete item in the interim period in which the change occurs. As of December 31, 2017 and December 25, 2016, the Company had no uncertain income tax positions.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions. The Company is currently open to audit, subject to the statute of limitations, by the Internal Revenue Service for the years ended December 29, 2013 through December 31, 2017. The Company is currently open to audit, subject to the statute of limitations, under certain states for the years ended December 29, 2013 through December 31, 2017. In 2012, the Company was audited by the Internal Revenue Service for the fiscal year ended December 26, 2010. On August 25, 2016, the Company executed an agreement to settle this audit with the Internal Revenue Service. This settlement did not have a material impact on the Company's financial statements. It is the Company’s policy to include any penalties and interest related to income taxes in its income tax provision; however, the Company currently has no penalties or interest related to income taxes.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the
"Tax Cuts and Jobs Act" (Tax Act). The Tax Act significantly revises U.S. tax law by, among other provisions, lowering the U.S. federal statutory income tax rate from 35% to 21% effective January 1, 2018, changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017 and eliminating or reducing certain income tax deductions.
The effects of changes in tax laws are required to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the Tax Act’s provisions, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows companies to record the tax effects of the Tax Act on a provisional basis based on a reasonable estimate, and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. Adjustments may differ from provisional estimates, possibly materially, during the measurement period due to, among other things, further refinement of the Company's calculations, changes in interpretations and assumptions and regulatory changes from the Internal Revenue Service, the SEC, the FASB and various tax jurisdictions. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.
In connection with the Company’s initial analysis of the Tax Act, it recorded a decrease of its net deferred tax assets of $10.2 million for the period ended December 31, 2017, to account for the rate reduction. This did not have an impact on the
Company’s financial statements since its U.S. deferred tax assets are fully offset by a valuation allowance. However, given the
significant complexity of the Tax Act, these estimates may be adjusted during the measurement period.