Del Taco Restaurants, Inc.

Income Taxes

The component of the provision for income taxes are as follows (in thousands):



	Successor								Predecessor
	52 Weeks Ended			53 Weeks Ended		26 Weeks Ended			26 Weeks Ended
	January 2, 2018			January 3, 2017		December 29, 2015			June 30, 2015
Current:
Federal	$	5,884		$	4,204	$	—		$	110
State	886			270		24			79
	6,770			4,474		24			189
Deferred:
Federal	(24,636		)	7,145		(90		)	15
State	2,042			3,710		178			536
	(22,594		)	10,855		88			551
Income tax (benefit) provision	$	(15,824	)	$	15,329	$	112		$	740

On December 22, 2017, the Tax Cuts and Jobs Act, (the “Act”) was enacted, reducing the U.S. federal corporate income tax rate from 35% to 21%, among other changes, for tax years beginning after December 31, 2017.

The SEC staff issued Staff Accounting Bulletin 118, ("SAB 118") which provides guidance on accounting for the tax effects of the Act for which the accounting under ASC 740, Income Taxes (“ASC 740”) is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act.

The Company re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was a tax benefit of approximately $29.1 million based on currently available information and interpretations, which are continuing to evolve. The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of January 2, 2018 (Successor), and the Company will continue to refine such amounts within the measurement period provided by SAB 118. The Company expects to complete its analysis no later than the fourth quarter of 2018.

The effective tax rates for the fifty-two weeks ended January 2, 2018 (Successor), fifty-three weeks ended January 3, 2017 (Successor), twenty-six weeks ended December 29, 2015 (Successor) and twenty-six weeks ended June 30, 2015 (Predecessor) were (46.5)%, 42.3%, 4.1% and 26.0%, respectively. The difference between the effective rates and the statutory federal income tax rate is composed of the following items (dollars in thousands):



	Successor															Predecessor
	52 Weeks Ended					53 Weeks Ended					26 Weeks Ended					26 Weeks Ended
	January 2, 2018					January 3, 2017					December 29, 2015					June 30, 2015
Federal income taxes	$	11,916		35.0	%	$	12,685		35.0	%	$	968		35.0	%	$	995		35.0	%
State and local income taxes, net of federal tax benefit	1,688			5.0	%	1,882			5.2	%	280			10.1	%	435			15.3	%
Targeted job credits	(420		)	(1.2	)%	(448		)	(1.2	)%	(512		)	(18.5	)%	(34		)	(1.2	)%
Warrant liability	—			—	%	—			—	%	—			—	%	(12		)	(0.4	)%
Investment in subsidiary	—			—	%	570			1.6	%	83			3.0	%	383			13.5	%
Change in valuation allowance	—			—	%	—			—	%	(1,927		)	(69.7	)%	(2,805		)	(98.6	)%
Tax reform	(29,111		)	(85.5	)%	—			—	%	—			—	%	—			—	%
Transaction costs	—			—	%	227			0.6	%	1,194			43.2	%	2,255			79.3	%
Permanent tax differences and other	103			0.2	%	413			1.1	%	26			1.0	%	(477		)	(16.9	)%
Income tax (benefit) provision	$	(15,824	)	(46.5	)%	$	15,329		42.3	%	$	112		4.1	%	$	740		26.0	%

Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):



	Successor
	January 2, 2018			January 3, 2017
Deferred tax assets:
Deferred rent	$	741		$	630
Accrued insurance	3,332			4,699
Reserve for restructuring and closed restaurants	763			1,252
Net operating loss carryforwards and tax credits	485			988
Deferred income	1,069			1,801
Stock-based compensation	767			919
Accrued compensation	472			2,897
Other, net	355			650
Deferred tax assets	7,984			13,836
Less valuation allowance	—			—
Net deferred tax assets	7,984			13,836
Deferred tax liabilities:
Property, equipment and intangibles	(67,696		)	(96,929		)
Investment in subsidiary	(7,420		)	(6,045		)
Prepaid expenses	(1,442		)	(2,135		)
Deferred tax liabilities	(76,558		)	(105,109		)
Net deferred tax liabilities	$	(68,574	)	$	(91,273	)

The Company maintains deferred tax liabilities related to trademarks and other indefinite lived assets that are not netted against the deferred tax assets as reversal of the taxable temporary difference cannot serve as a source for realization of the deferred tax assets, because the deferred tax liability will not reverse until some indefinite future period when the assets are either sold or written down due to an impairment.

As part of purchase accounting, the Company was required to record all of DTH’s acquired assets and liabilities at their acquisition date fair value, including deferred income taxes. The Company considered the weight of both positive and negative evidence and concluded that it is more likely than not that DTH's deferred tax assets will be realized and that no valuation allowance on DTH's deferred tax asset was required as of the date of acquisition.

As a result, the Company established deferred tax assets as well as deferred tax liabilities related to indefinite-lived intangibles through the purchase price allocation (see Note 3). In addition, after considering the Business Combination, the projected post-combination results and all available evidence, the Company released $1.9 million of valuation allowance that was previously provided against the Company's deferred tax assets. In accordance with ASC 805-740-30-3, the Company recorded this release through income tax benefit during the twenty-six week period ended December 29, 2015 (Successor).

The Company did not have any federal or state net operating loss carryforwards as of January 2, 2018 (Successor). The Company had no federal tax credit carryfowards as of January 2, 2018 (Successor). State tax credit carryforwards as of January 2, 2018 (Successor) totaled $0.6 million and begin to expire in 2024.

As of January 2, 2018 (Successor) and January 3, 2017 (Successor), the Company considered the weight of both positive and negative evidence and concluded that it is more likely than not that the Company's deferred tax assets will be realized and no valuation allowance is required.

As of January 2, 2018 (Successor) and January 3, 2017 (Successor), the liability for unrecognized tax positions was $0.2 million, and is included in other non-current liabilities in the consolidated balance sheets. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of January 2, 2018 (Successor), the Company did not have any accrued interest and penalties related to uncertain tax positions. The Company does not expect any significant increases or decreases within the next twelve months to its unrecognized tax positions. The total amount of net unrecognized tax positions that would impact the Company's effective tax rate, if ever recognized, is $0.2 million.

The following table summarizes the changes to unrecognized tax positions (in thousands):



	Successor						Predecessor
	52 Weeks Ended		53 Weeks Ended		26 Weeks Ended		26 Weeks Ended
	January 2, 2018		January 3, 2017		December 29, 2015		June 30, 2015
Balance at beginning of period	$	212	$	212	$	212	$	—
Increases (decreases) related to prior year tax positions	—		—		—		—
Increases (decreases) related to current year tax positions	—		—		—		212
Expiration of the statute of limitations for the assessment of taxes	—		—		—		—
Settlements	—		—		—		—
Balance at end of period	$	212	$	212	$	212	$	212

The Company is subject to U.S. and state income taxes. The Company is no longer subject to federal and state income tax examinations for years before 2014 and 2013, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses and tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss and tax credit carry forward amounts.

The Protecting Americans From Tax Hikes (PATH) Act was enacted on December 21, 2015. Included within this legislation was the work opportunity credit, and extension of the fifty percent first year bonus depreciation, both of which had previously expired on December 31, 2014. As the legislation was enacted during the fourth quarter of fiscal year 2015, the impact was not previously accounted for in the Company's effective tax rate or income tax payable calculations. The impact to the effective tax rate during the twenty-six weeks ended December 29, 2015 (Successor) was approximately (18.5)%.