Income Taxes

12 Months Ended

Jan. 02, 2018

The following table presents the domestic and foreign components of income (loss) before income taxes for 2017, 2016 and 2015 (in thousands):



	2017			2016			2015
Domestic loss	$	(42,047	)	$	(67,626	)	$	(21,674	)
Foreign income (loss)	4,358			(2,818		)	(825		)
	$	(37,689	)	$	(70,444	)	$	(22,499	)

The components of the provision (benefit) for income taxes are as follows for 2017, 2016 and 2015 (in thousands):



	2017			2016			2015
Current tax provision:
Federal	$	—		$	—		$	—
State	21			134			144
Foreign	—			—			—
	21			134			144
Deferred tax (benefit) provision:
Federal	(252		)	(1,979		)	(7,169		)
State	24			2,854			(1,495		)
Foreign	—			224			(214		)
	(228		)	1,099			(8,878		)
Total (benefit) provision for income taxes	$	(207	)	$	1,233		$	(8,734	)

The reconciliation of income tax provision (benefit) that would result from applying the federal statutory rate to pre-tax income as shown in the accompanying Consolidated Statements of Operations is as follows for 2017, 2016 and 2015 (in thousands):



	2017			2016			2015
Federal income tax benefit at federal rate	$	(12,814	)	$	(23,740	)	$	(7,650	)
State income tax benefit, net of federal tax	(1,790		)	(2,975		)	(960		)
Other permanent differences	674			996			378
Foreign rate differential	(463		)	214			66
Tax credits	(808		)	(749		)	(423		)
Change in valuation allowance	(159		)	27,353			—
Tax rate change	13,632			—			—
Deferred tax asset write-off	2,618			—			—
Other items, net	(1,097		)	134			(145		)
(Benefit) provision for income taxes	$	(207	)	$	1,233		$	(8,734	)
Effective income tax rate	0.5		%	(1.8		)%	38.8		%

In 2017, 2016 and 2015, the Company did not recognize any tax benefits on option exercises at fair value in excess of those utilized to record stock-based compensation for book purposes.

The Company’s total deferred tax assets and liabilities are as follows (in thousands):



	2017			2016
Deferred tax assets	$	47,027		$	43,853
Deferred tax liabilities	(11,632		)	(16,935		)
Total deferred tax liabilities	35,395			26,918
Valuation allowance	(35,811		)	(27,353		)
Net deferred tax liabilities	$	(416	)	$	(435	)

Deferred income taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following (in thousands):



	2017			2016
Deferred tax assets (liabilities):
Loss carry forwards	$	26,991		$	14,046
Deferred rent and franchise revenue	10,486			17,753
Property, equipment and intangible assets	(9,858		)	(14,130		)
Stock-based compensation	1,086			2,802
Tax credit carry forwards	3,123			2,636
Inventory smallwares	(1,774		)	(2,805		)
Other accrued expenses	4,320			5,022
Other	1,021			1,594
Total net deferred tax assets	35,395			26,918
Valuation allowance	(35,811		)	(27,353		)
Net deferred tax liabilities	$	(416	)	$	(435	)

For the year ended January 2, 2018, the Company determined that it was appropriate to maintain a valuation allowance of $35.8 million against U.S. deferred tax assets due to uncertainty regarding the realizability of future tax benefits. The valuation allowance is recorded against net deferred tax assets, exclusive of indefinite-lived intangibles. The Company will maintain this valuation allowance until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit to the effective tax rate.

The Company closed all Canadian restaurants and discontinued foreign business operations during the year ended January 2, 2018. As a result, all Canadian deferred tax assets were written off against the previously recorded Canadian valuation allowance.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changes to the Internal Revenue Code that will impact the Company. For tax years after December 31, 2017, the corporate income tax rate is reduced from 34% to 21%. As a result of the change in the future income tax rate, the Company revalued its deferred tax assets and liabilities using a 21% federal tax rate for the year ended January 2, 2018.

On the same date, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued by the SEC to address the application of US GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company is still analyzing the changes to deferred tax assets and liabilities and other aspects of the Tax Act. While the amount recorded for the year ended January 2, 2018 is provisional, the Company expects that any material changes required by the Tax Act will be offset by the U.S. valuation allowance. The Company will continue to evaluate this, and other aspects of the Tax Act, to determine if any adjustments are required to be made during the measurement period provided by SAB 118.

As of January 2, 2018 and January 3, 2017, net operating loss (“NOL”) carry forwards for federal income tax purposes of approximately $106.7 million and $60.5 million, respectively, were available to offset future taxable income through the years 2037 and 2036, respectively. The Internal Revenue Code Section 382 generally limits the utilization of NOLs when there is an ownership change. The Company has not completed an analysis of ownership changes through January 2, 2018. Prior to the utilization of NOLs in the future, the Company will complete a Section 382 study to determine whether there are any limitations. If such a limitation exists, it is possible that a portion of the NOLs may not be available for use before expiration. The Company adopted ASU 2016-09 during the year ended January 2, 2018, which resulted in a cumulative increase of $8.6 million to GAAP basis NOL.

Uncertain tax positions are recognized if it is more likely than not that the Company will be able to sustain the tax position taken, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.

There were no uncertain tax positions for the years ended January 2, 2018 or January 3, 2017. The only periods subject to examination for the Company’s federal, foreign and state returns are 2013 through 2016.