17. Income Taxes
On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which changes various corporate income tax provisions within the existing Internal Revenue Code. Substantially all the provisions of the Tax Act are effective for taxable years beginning after December 31, 2017.The most significant changes that impact the Company are the reduction in the corporate federal income tax rate from 35% to 21% and 100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. In a manner consistent with ASC 740-10-25-47, the effect of a change in tax law or rates shall be recognized at the date of enactment, accordingly, the Company accounted for the corporate federal income tax rate reduction in the fourth quarter of 2017.
The staff of the US Securities and Exchange Commission (SEC) has recognized the complexity of reflecting the impacts of the Tax Act, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (SAB 118) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the measurement period). SAB 118 describes three scenarios (or “buckets”) associated with a company’s status of accounting for the Tax Act: (1) a company is complete with its accounting for certain effects of the Tax Act, (2) a company is able to determine a reasonable estimate for certain effects of the Tax Act and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
The Company has substantially completed the measurement and accounting of certain effects of the enactment of the Tax Act which have been reflected in the 2017 financial statements. The Company reduced its net deferred tax liability, resulting in a non-cash income tax benefit of approximately $18.7 million in the fourth quarter of 2017. The Company anticipates the issuance of guidance and regulations for various provisions in the Tax Act which may have an impact on the amounts reflected in the 2017 financial statements. The Company will evaluate future guidance and regulations and reflect changes in the financial statements in the period the accounting is completed.
Income Tax Provision
The income tax provision consists of the following:
|
|
|
Year Ended |
|
|||||||||
|
|
|
December 31, 2017 |
|
|
January 1, 2017 |
|
|
January 3, 2016 |
|
|||
|
U.S. Federal—current |
|
$ |
(31,667 |
) |
|
$ |
(44,588 |
) |
|
$ |
(51,322 |
) |
|
U.S. Federal—deferred |
|
|
(6,551 |
) |
|
|
(19,293 |
) |
|
|
(15,155 |
) |
|
U.S. Federal—total |
|
|
(38,218 |
) |
|
|
(63,881 |
) |
|
|
(66,477 |
) |
|
State—current |
|
|
(7,337 |
) |
|
|
(9,036 |
) |
|
|
(9,619 |
) |
|
State—deferred |
|
|
(1,523 |
) |
|
|
(1,369 |
) |
|
|
(906 |
) |
|
State—total |
|
|
(8,860 |
) |
|
|
(10,405 |
) |
|
|
(10,525 |
) |
|
Total provision |
|
$ |
(47,078 |
) |
|
$ |
(74,286 |
) |
|
$ |
(77,002 |
) |
Tax Rate Reconciliation
Income tax provision differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:
|
|
|
Year Ended |
|
|||||||||
|
|
|
December 31, 2017 |
|
|
January 1, 2017 |
|
|
January 3, 2016 |
|
|||
|
Federal statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
Decrease in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit |
|
|
3.20 |
|
|
|
3.73 |
|
|
|
3.82 |
|
|
Tax Act benefit |
|
|
(9.10 |
) |
|
|
— |
|
|
|
— |
|
|
Excess tax benefits from share based payments |
|
|
(4.33 |
) |
|
|
— |
|
|
|
— |
|
|
Other, net |
|
|
(1.86 |
) |
|
|
(1.32 |
) |
|
|
(1.44 |
) |
|
Effective tax rate |
|
|
22.91 |
% |
|
|
37.41 |
% |
|
|
37.38 |
% |
The effective income tax rate decreased to 22.91% in 2017 from 37.41% in 2016 primarily due to the enactment of the Tax Act as disclosed above and the recognition of excess tax benefits related to the exercise or vesting of equity based awards in the income tax provision resulting from the adoption of ASU 2016-09. See Note 3 “Significant Accounting Policies.” The effective income tax rate increased to 37.41% in 2016 from 37.38% in 2015 as a result of a slight decrease in tax credits and enhanced charitable food contribution deductions for 2016.
Excess tax benefits associated with share-based payment awards are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. The income tax benefits resulting from equity-based awards were $9.9 million for 2017 and are reflected as a reduction to the 2017 income tax provision. The income tax benefits resulting from equity-based awards were $3.7 million and $20.0 million for 2016 and 2015 and recorded in Additional Paid-in Capital under prior accounting guidance.
Deferred Taxes
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:
|
|
|
As Of |
|
|||||
|
|
|
December 31, 2017 |
|
|
January 1, 2017 |
|
||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
Employee benefits |
|
$ |
20,332 |
|
|
$ |
26,650 |
|
|
Tax credits |
|
|
410 |
|
|
|
408 |
|
|
Lease related |
|
|
61,489 |
|
|
|
84,744 |
|
|
Other accrued liabilities |
|
|
5,605 |
|
|
|
9,986 |
|
|
Charitable contribution carryforward |
|
|
12,800 |
|
|
|
15,928 |
|
|
Inventories and other |
|
|
1,844 |
|
|
|
2,087 |
|
|
Total gross deferred tax assets |
|
|
102,480 |
|
|
|
139,803 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(109,245 |
) |
|
|
(137,230 |
) |
|
Intangible assets |
|
|
(20,301 |
) |
|
|
(21,021 |
) |
|
Other |
|
|
— |
|
|
|
(815 |
) |
|
Total gross deferred tax liabilities |
|
|
(129,546 |
) |
|
|
(159,066 |
) |
|
Net deferred tax (liability) / asset |
|
$ |
(27,066 |
) |
|
$ |
(19,263 |
) |
A valuation allowance is established for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that the realization of future deductions is uncertain.
Management performs an assessment over future taxable income to analyze whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company has evaluated all available positive and negative evidence and believes it is probable that the deferred tax assets will be realized and has not recorded a valuation allowance against the Company’s deferred tax assets as of December 31, 2017 and January 1, 2017.
The Company has state income tax credits of $0.4 million which are available to offset future state income taxes. These credits have no expiration date.
The Company applies the authoritative accounting guidance under ASC 740 for the recognition, measurement, classification and disclosure of uncertain tax positions taken or expected to be taken in a tax return.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
|
|
As Of |
|
|||||||||
|
|
|
December 31, 2017 |
|
|
January 1, 2017 |
|
|
January 3, 2016 |
|
|||
|
Beginning balance |
|
$ |
819 |
|
|
$ |
737 |
|
|
$ |
626 |
|
|
Additions based on tax positions related to the current year |
|
|
95 |
|
|
|
104 |
|
|
|
114 |
|
|
Reductions for tax positions for prior years |
|
|
(120 |
) |
|
|
(22 |
) |
|
|
(3 |
) |
|
Ending balance |
|
$ |
794 |
|
|
$ |
819 |
|
|
$ |
737 |
|
At both December 31, 2017 and January 1, 2017, the Company had unrecognized tax benefits of $0.8 million (tax effected) that would impact the effective tax rate if recognized.
The Company’s policy is to recognize accrued interest and penalties as a component of income tax expense.
The Company anticipates an increase in the total amount of unrecognized tax benefits during the next twelve months related to depreciation for transaction cost allocation in the amount of $0.1 million.
The Company files income tax returns with federal and state tax authorities within the United States. The statute of limitations for income tax examinations remains open for federal tax returns for tax years 2014 through 2016 and state tax returns for the tax years 2013 through 2016.