In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that affect the Company, most notably a reduction of the top U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for the 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 the deductibility executive compensation and interest.
The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740 Income Taxes in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete, but a reasonable estimate could be determined. The Company included provisional estimates of income tax effects of the 2017 Tax Act because the interaction between valuation allowance and future deferred tax assets and liabilities is uncertain as of January 1, 2018.
The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which the Company believes have the most significant impact on the Company’s federal income taxes, are as follows:
Reduction of the U.S. Corporate Income Tax Rate
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. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the Company’s statutory U.S. corporate income tax rate from 34% percent to 21%, resulting in a $12.6 million decrease in income tax expense for the year ended January 1, 2018 and a corresponding $12.6 million decrease in net deferred tax liabilities as of January 1, 2018.
The components of the (benefit from) provision for income taxes are as follows:
|
| | | | | | | | | | | |
(in thousands) | 2017 | | 2016 | | 2015 |
Current tax provision | | | | | |
Federal | $ | 9 |
| | $ | 5 |
| | $ | 83 |
|
State | 171 |
| | 214 |
| | 278 |
|
| 180 |
| | 219 |
| | 361 |
|
Deferred tax (benefit) provision | | | | | |
Federal | (18,877 | ) | | 1,508 |
| | 2,211 |
|
State | (846 | ) | | 216 |
| | (504 | ) |
| (19,723 | ) | | 1,724 |
| | 1,707 |
|
Total (benefit from) provision for income taxes | $ | (19,543 | ) | | $ | 1,943 |
| | $ | 2,068 |
|
The components of the non-current deferred tax liability are as follows:
|
| | | | | | | |
(in thousands) | 2017 | | 2016 |
Deferred income tax assets: | | | |
Unearned franchise and development fees | $ | 246 |
| | $ | 379 |
|
Convention and Advertising funds balance | 208 |
| | 380 |
|
Compensation accruals | 449 |
| | 102 |
|
Gift card accruals | 348 |
| | 458 |
|
Asset retirement obligation | 120 |
| | 201 |
|
Deferred rent | 283 |
| | 434 |
|
Share-based compensation | 769 |
| | 1,082 |
|
Net operating loss | 1,013 |
| | 1,598 |
|
Other | 213 |
| | 387 |
|
Total deferred tax assets | 3,649 |
| | 5,021 |
|
Valuation allowance | (98 | ) | | (61 | ) |
Total deferred tax assets after valuation allowance | 3,551 |
| | 4,960 |
|
Deferred income tax liabilities: | | | |
Fixed asset, goodwill, and intangible asset basis differences | (27,273 | ) | | (46,836 | ) |
Other | (735 | ) | | (2,303 | ) |
Total deferred tax liabilities | (28,008 | ) | | (49,139 | ) |
Net deferred tax liability | $ | (24,457 | ) | | $ | (44,179 | ) |
As of the end of fiscal 2017, the Company had federal and state net operating loss carry forwards of $3.8 million and $5.0 million, respectively. As of the end of fiscal 2016, the Company had federal and state net operating loss carry forwards of $4.2 million and $3.9 million, respectively. The federal and state net operating loss carry forwards begin to expire in 2032 and 2020, respectively. As of the end of fiscal 2017, the Company has federal credit carryovers of $0.6 million that are a combination of credits that begin to expire in 2035.
Tax benefits for federal and state net operating loss carry forwards are recorded as an asset to the extent that management assesses the utilization of such assets to be “more likely than not”; otherwise, a valuation allowance is required to be recorded. The Company has looked to future reversals of existing taxable temporary differences in determining that its federal and a majority of its state net operating loss carry forwards are more likely than not to be utilized prior to their expiration dates. Consequently, no valuation allowance has been recorded for these deferred tax assets. Several separate filing states where the Company operates have facts that indicate it is more likely that the Company will not utilize the separate filing state carryovers prior to their expiration dates. As of the end of fiscal 2017, the Company has recorded a $98,000 valuation allowance for these particular carryovers. The Company will continue to evaluate the need for a valuation allowance in the future. Changes in estimated future taxable income and other underlying factors may lead to adjustments to the valuation allowance in the future.
As of the end of fiscal 2017, the Company had $77,000 of unrecognized tax benefits that, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending liability for unrecognized tax benefits excluding interest and penalties is as follows (in thousands):
|
| | | |
Balance as of the end of fiscal 2016 | $ | 72 |
|
Additions for tax positions of prior years | 5 |
|
Balance as of the end of fiscal 2017 | $ | 77 |
|
A reconciliation of income tax at the United States federal statutory tax rate (using a statutory tax rate of 34%) to income tax expense for the periods reported is as follows:
|
| | | | | | | | | | | |
(in thousands) | 2017 | | 2016 | | 2015 |
Federal income tax provision based on statutory rate | $ | (6,647 | ) | | $ | 1,561 |
| | $ | 2,203 |
|
State and local income tax effect | (445 | ) | | 284 |
| | 314 |
|
Impact of change in tax rates | (12,621 | ) | | — |
| | (464 | ) |
Non-deductible expenses | 203 |
| | 255 |
| | 133 |
|
Tax credits and other | (33 | ) | | (157 | ) | | (118 | ) |
(Benefit from) provision for income taxes | $ | (19,543 | ) | | $ | 1,943 |
| | $ | 2,068 |
|