INCOME TAXES
The provision for income taxes is based on the following components (in thousands):
|
| | | | | | | | | | | |
For the Years Ended | December 27, 2017 | | December 28, 2016 | | December 30, 2015 |
Current income taxes: | |
| | |
| | |
|
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 250 |
| | 224 |
| | 188 |
|
Total current | 250 |
| | 224 |
| | 188 |
|
Deferred income taxes: | |
| | |
| | |
|
Federal | 1,495 |
| | 9,660 |
| | 8,871 |
|
State | 192 |
| | 2,730 |
| | 6,378 |
|
Total deferred | 1,687 |
| | 12,390 |
| | 15,249 |
|
Charge in lieu of tax (attributable to stock options) | — |
| | 169 |
| | 5,420 |
|
Adjustment to deferred taxes for tax rate change | (1,440 | ) | | — |
| | — |
|
Tax provision for income taxes | $ | 497 |
| | $ | 12,783 |
| | $ | 20,857 |
|
The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows:
|
| | | | | | | | |
For the Years Ended | December 27, 2017 | | December 28, 2016 | | December 30, 2015 |
Statutory federal income tax rate of 35% applied to
earnings before income taxes and extraordinary items | 35.0 | % | | 35.0 | % | | 35.0 | % |
TRA expense | (21.4 | ) | | 0.4 |
| | 0.1 |
|
Revaluation of deferred taxes | (15.8 | ) | | — |
| | — |
|
Change in valuation allowance | 10.9 |
| | 1.3 |
| | 6.5 |
|
WOTC Credit | (2.5 | ) | | (0.8 | ) | | — |
|
State tax benefit (net of federal benefit) | 0.6 |
| | 5.0 |
| | 5.1 |
|
State tax credits | — |
| | — |
| | (0.6 | ) |
Other | (1.3 | ) | | 0.2 |
| | 0.3 |
|
Total | 5.5 | % | | 41.1 | % | | 46.4 | % |
Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets. After evaluating all of the positive and negative evidence, including the Company’s continued income from operations, the Company concluded that it is more likely than not that its deferred tax assets will be realized. In fiscal 2015 and 2016, the Company recorded a valuation allowance of approximately $2.9 million and $0.4 million, respectively, against its deferred tax asset resulting from certain tax credits that may not be realizable prior to the time the credits expire. In fiscal 2017, the Company recorded an additional $1.0 million to the valuation allowance. As of December 27, 2017 the total valuation allowance was $4.3 million.
On July 30, 2014, the Company entered into the TRA. The TRA calls for the Company to pay its pre-IPO stockholders 85% of the cash savings that the Company realizes in its taxes as a result of utilizing its NOLs and other tax attributes attributable to preceding periods. The TRA charge (benefit) expense is a permanent add-back to the Company’s taxable income. TRA resulted in approximately $5.6 million of benefit in fiscal 2017 as a result of a reduction in the Federal corporate income tax rate related to the newly enacted tax reforms discussed further below, $0.4 million of tax expense in fiscal 2016, and $0.2 million of tax expense in fiscal 2015. In fiscal 2017, we paid $11.1 million to our pre-IPO stockholders under the TRA
As of December 27, 2017, the deferred tax assets related to California Enterprise Zone credits are $5.4 million.
The Company’s deferred tax assets and liabilities as of December 27, 2017 and December 28, 2016 are summarized below. The 2017 balances reflect the revaluation for the reduction in the Federal corporate rate to 21%. The 2016 balances are presented at the pre-new tax law rate of 35%.
|
| | | | | | | |
| December 27, 2017 | | December 28, 2016 |
Deferred assets: | |
| | |
|
Capital leases | $ | 90 |
| | $ | 197 |
|
Accrued vacation | 428 |
| | 658 |
|
Accrued legal | — |
| | 308 |
|
Deferred rent | 3,516 |
| | 4,351 |
|
Accrued workers’ compensation | 1,450 |
| | 1,932 |
|
Enterprise zone and other credits | 12,722 |
| | 11,982 |
|
Net operating losses | 13,488 |
| | 30,452 |
|
Fixed assets | 4,176 |
| | — |
|
Other | 2,261 |
| | 2,737 |
|
Total deferred tax assets | 38,131 |
| | 52,617 |
|
Valuation allowance | (4,306 | ) | | (3,311 | ) |
Net deferred tax assets | 33,825 |
| | 49,306 |
|
Deferred liabilities: | |
| | |
|
Goodwill | (6,037 | ) | | (8,809 | ) |
Trademark | (17,613 | ) | | (26,463 | ) |
Prepaid expense | (380 | ) | | (523 | ) |
Fixed asset | — |
| | (1,771 | ) |
Other | (2,628 | ) | | (4,323 | ) |
Deferred tax liabilities | (26,658 | ) | | (41,889 | ) |
Net deferred tax asset | $ | 7,167 |
| | $ | 7,417 |
|
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 reduces the corporate tax rate to from 35% to 21%, effective for tax years beginning January 1, 2018. The Company is subject to the provisions of the FASB Accounting Standards Codification 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. The enacted reduction in the corporate federal income tax rate resulted in a re-measurement of the Company’s net deferred tax assets and liabilities with a one-time, non-cash increase to income tax benefit. Consequently, we have recorded a decrease related to deferred tax assets and deferred tax liabilities of $12.1 million and $13.5 million, respectively, with a net benefit to deferred income tax expense of $1.4 million for the year ended December 27, 2017. In addition, under the new tax law, the corporate alternative minimum tax (“AMT”) is repealed effective for tax years beginning January 1, 2018. For tax years beginning in 2018, 2019 and 2020, to the extent AMT credit carryovers exceed regular tax liability, 50% of the excess of AMT credit carryovers would be refundable. Any remaining AMT credits would be fully refundable in 2021.
As of December 27, 2017, the Company has federal and state NOL carryforwards of approximately $55.8 million and $20.1 million, respectively, which expire beginning in 2030 and 2025, respectively. The Company also has state enterprise zone credits of approximately $10.9 million, which expire in 2023, federal Work Opportunity Credits of approximately $0.8 million, which will expire in 2038 and federal and state alternative minimum tax ("AMT") credits of approximately $0.9 million, which carry forward to 2021. The utilization of NOL carryforwards may be subject to limitation under section 382 of the Internal Revenue Code of 1986 (the “Code”) and similar state law provisions. In fiscal 2014, the Company completed a section 382 analysis and determined that all of the Company's NOL carryforwards and other tax attributes are subject to limitation under section 382. However, that limitation did not impact the Company's 2017 or 2016 year tax liability.
As of December 27, 2017, December 28, 2016, and December 30, 2015, the Company had no accrual for unrecognized tax benefits. Consequently, no interest or penalties have been accrued by the Company. The Company believes that no significant changes to the amount of unrecognized tax benefits will occur within the next twelve months.
The Company is subject to taxation in the United States and in various state jurisdictions. The Company is no longer subject to U.S. examination for years before 2013 by the federal taxing authority, and for years before 2012 by state taxing authorities.