Note 13 – Income Taxes
Significant components of the Company’s income tax expense (benefit) for the periods indicated below are as follows:
|
|
|
Year Ended |
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|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
|
|||
|
|
|
2017 |
|
|
2017 |
|
|
2016 |
|
|||
|
Current income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
264 |
|
|
$ |
2,189 |
|
|
$ |
946 |
|
|
State and local |
|
|
743 |
|
|
|
774 |
|
|
|
359 |
|
|
Total current income taxes |
|
|
1,007 |
|
|
|
2,963 |
|
|
|
1,305 |
|
|
Deferred income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,881 |
) |
|
|
(922 |
) |
|
|
217 |
|
|
State and local |
|
|
(473 |
) |
|
|
21 |
|
|
|
33 |
|
|
Total deferred income taxes |
|
|
(2,354 |
) |
|
|
(901 |
) |
|
|
250 |
|
|
Income tax expense (benefit) |
|
$ |
(1,347 |
) |
|
$ |
2,062 |
|
|
$ |
1,555 |
|
The Company’s effective tax rate differs from the federal statutory rate as set forth in the following table for the periods indicated:
|
|
|
Year Ended |
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|||||||||
|
|
|
December 31, |
|
|
January 1, |
|
|
January 3, |
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|||
|
|
|
2017 |
|
|
2017 |
|
|
2016 |
|
|||
|
Federal income tax |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
34.0 |
% |
|
Federal tax reform |
|
|
(22.4 |
)% |
|
|
- |
|
|
|
- |
|
|
Effect of rates due to pass-through entities |
|
|
- |
|
|
|
- |
|
|
|
(14.7 |
)% |
|
State income tax |
|
|
6.4 |
% |
|
|
6.5 |
% |
|
|
6.9 |
% |
|
Transaction costs |
|
|
- |
|
|
|
- |
|
|
|
2.0 |
% |
|
FICA tip credit |
|
|
(32.8 |
)% |
|
|
(20.1 |
)% |
|
|
(6.9 |
)% |
|
Uncertain tax positions |
|
|
(3.9 |
)% |
|
|
(0.1 |
)% |
|
|
(1.3 |
)% |
|
Return to provision |
|
|
(4.5 |
)% |
|
|
- |
|
|
|
- |
|
|
Rate differential between current and deferred taxes |
|
|
(1.7 |
)% |
|
|
- |
|
|
|
2.5 |
% |
|
Incentive stock options |
|
|
2.0 |
% |
|
|
0.9 |
% |
|
|
|
|
|
Other |
|
|
(0.6 |
)% |
|
|
0.4 |
% |
|
|
- |
|
|
Effective tax rate |
|
|
(22.5 |
)% |
|
|
22.6 |
% |
|
|
22.5 |
% |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act includes a number of changes to the U.S. tax code that affected fiscal year 2017, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017 and the acceleration of depreciation for certain assets placed into service after September 27, 2017.
In connection with its initial analysis of the impact of the Tax Act, the Company has recorded a net tax benefit of $(1,345) in fiscal year 2017 related to the revaluation of the Company's deferred tax assets and liabilities. Since the Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid, the Company’s deferred tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a $(1,345) decrease in income tax expense for the year ended December 31, 2017, and a corresponding decrease in net deferred tax liabilities as of December 31, 2017.
There are also provisions in the Tax Act that are effective for tax years beginning after December 31, 2017, that have no impact on the deferred tax balance for fiscal year 2017. Therefore, the tax impact of these provisions will be reflected in the fiscal year 2018 Consolidated Financial Statements. The accounting for the income tax effects of these provisions is not yet complete.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of the Tax Act for the reporting period of enactment. SAB 118 allows the Company to provide a provisional estimate of the impacts of the Tax Act during a measurement period similar to the measurement period used when accounting for business combinations. Adjustments to provisional estimates and additional impacts from the Tax Act must be recorded as they are identified during the measurement period as provided for in SAB 118. The Company has not completed its accounting for the income tax effects of the Tax Act, including, but not limited to, the impacts of depreciation, compensation and fringe benefits. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts in accordance with SAB 118.
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 tax assets and liabilities as of December 31, 2017, and January 1, 2017, are as follows:
|
|
|
December 31, |
|
|
January 1, |
|
||
|
|
|
2017 |
|
|
2017 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
173 |
|
|
$ |
182 |
|
|
Accrued bonuses |
|
|
17 |
|
|
|
108 |
|
|
Stock options |
|
|
159 |
|
|
|
97 |
|
|
State bonus depreciation |
|
|
400 |
|
|
|
74 |
|
|
Other |
|
|
- |
|
|
|
8 |
|
|
Total deferred tax assets |
|
|
749 |
|
|
|
469 |
|
|
Less: deferred tax assets valuation allowance |
|
|
(105 |
) |
|
|
(68 |
) |
|
Total net deferred tax assets |
|
|
644 |
|
|
|
401 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Partnership differences |
|
|
(2,119 |
) |
|
|
(4,211 |
) |
|
Other |
|
|
(78 |
) |
|
|
- |
|
|
Total deferred tax liabilities |
|
|
(2,197 |
) |
|
|
(4,211 |
) |
|
Net deferred tax (liability) asset |
|
$ |
(1,553 |
) |
|
$ |
(3,810 |
) |
ASC Topic 740, Income Taxes, establishes procedures to measure deferred tax assets and liabilities and assess whether a valuation allowance relative to existing deferred tax assets is necessary. Management assesses the likelihood of realization of the Company’s deferred tax assets and the need for a valuation allowance with respect to those assets based on the weight of available positive and negative evidence. As of December 31, 2017, management determined that a valuation allowance of $105 was necessary relative to certain state net operating loss carryforwards which are not expected to be realized. Management also determined at December 31, 2017 that it is more likely than not that the results of future operations and reversal of deferred tax liabilities will generate sufficient taxable income to realize the remaining deferred tax assets not covered by this valuation allowance.
As of December 31, 2017, the Company has state gross operating loss carryforwards gross of the valuation allowance discussed above of approximately $3,570 expiring in years 2027 through 2037, and federal gross operating loss carryforwards of $195 expiring in year 2037.
Additionally, the Company recorded a liability (including interest) in connection with uncertain tax positions related to state tax issues totaling $66 and $299 as of December 31, 2017 and January 1, 2017, respectively. The Company elected to accrue interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company accrued interest related to unrecognized tax benefits of approximately $3 and $109 as of December 31, 2017 and January 1, 2017, respectively. A reconciliation of the beginning and ending unrecognized tax benefit associated with these positions (excluding federal benefit and the aforementioned accrued interest) is as follows:
|
|
|
December 31, |
|
|
January 1, |
|
||
|
|
|
2017 |
|
|
2017 |
|
||
|
Balance at the beginning of the year |
|
$ |
294 |
|
|
$ |
228 |
|
|
Changes based on tax positions taken during the current year |
|
|
- |
|
|
|
- |
|
|
Changes based on tax positions taken during prior years |
|
|
- |
|
|
|
66 |
|
|
Reductions related to settlements with taxing authorities and |
|
|
|
|
|
|
|
|
|
lapses of statutes of limitations |
|
|
(214 |
) |
|
|
- |
|
|
Balance at the end of the year |
|
$ |
80 |
|
|
$ |
294 |
|
As of December 31, 2017, the total amount of gross unrecognized tax benefit that, if recognized, would impact the effective tax rate was $15. Within the next twelve months, the Company estimates that the gross unrecognized benefits will decrease by $15 due to state statute expiration.
The Company and its subsidiaries file a partnership federal income tax return, consolidated corporate federal income tax return, and a separate corporate federal income tax return as well as various state and local income tax returns. The earliest year open to examination in the Company’s major jurisdictions is 2014 for federal and state income tax returns.
Since the proposed acquisition of 99 Restaurants was abandoned in fiscal year 2018, as discussed in Notes 2 and 20, the transaction costs that were treated as a deferred tax asset in fiscal 2017 will be deductible in fiscal year 2018, and, therefore, should have no impact on the 2018 effective tax rate.