Income Taxes

12 Months Ended

Jan. 03, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of the provision (benefit) for income taxes are as follows for 2022, 2021 and 2020 (in thousands):

	2022		2021		2020
Current tax provision:
Federal	$	—	$	—	$	—
State	77		41		44
	77		41		44
Deferred tax (benefit) provision:
Federal	(27)		23		30
State	(13)		6		10
	(40)		29		40
Total provision for income taxes	$	37	$	70	$	84

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 2022, 2021 and 2020 (in thousands):

	2022			2021			2020
Federal income tax (benefit) provision at federal rate	$	(688)		$	784		$	(4,867)
State income tax (benefit) provision, net of federal tax	(112)			162			(1,191)
Other permanent differences	368			(17)			288
Tax credits	(1,608)			(1,297)			(390)
Change in valuation allowance	1,558			244			6,104
Tax rate change	—			6			(25)
Deferred tax asset write-off	320			207			157
Other items, net	199			(19)			8
Provision for income taxes	$	37		$	70		$	84
Effective income tax rate	(1.1)		%	1.9		%	(0.4)		%

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

	2022		2021
Deferred tax assets	$	113,054	$	110,098
Deferred tax liabilities	(65,961)		(64,603)
Total deferred tax assets	47,093		45,495
Valuation allowance	(47,322)		(45,764)
Net deferred tax liabilities	$	(229)	$	(269)

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):

	2022		2021
Deferred tax assets (liabilities):
Loss carry forwards	$	39,339	$	37,534
Deferred franchise revenue	2,411		1,128
Property, equipment and intangible assets	(14,802)		(11,821)
Stock-based compensation	1,970		1,676
Tax credit carry forwards	7,231		5,624
Interest expense	617		—
Inventory smallwares	(1,700)		(1,646)
Other accrued expenses	391		1,154
Operating lease assets	(49,459)		(51,136)
Operating lease liabilities	59,747		61,844
Other	1,348		1,138
Total net deferred tax assets	47,093		45,495
Valuation allowance	(47,322)		(45,764)
Net deferred tax liabilities	$	(229)	$	(269)

For the year ended January 3, 2023, the Company determined that it was appropriate to maintain a valuation allowance of $47.3 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 assets and liabilities. The Company will maintain the remaining 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.

As of January 3, 2023 and December 28, 2021, net operating loss (“NOL”) carry forwards for federal income tax purposes of approximately $153.5 million and $145.0 million, respectively, were available to offset future taxable income. Of these amounts, $106.8 million is available to offset future taxable income through 2037. Federal NOLs of $46.7 million created during the year ended January 1, 2019 and all subsequent years after can be carried forward indefinitely, but can only offset 80% of future taxable income. The Internal Revenue Code Section 382 generally limits the utilization of NOLs when there is an ownership change. The Company completed an analysis under Section 382 through January 3, 2023 and determined that there isn’t a current year limitation on utilization of tax attributes. Prior to the utilization of NOLs in the future, the Company will determine whether there are any limitations under Section 382. If such a limitation exists, it is possible that a portion of the NOLs may not be available for use before expiration.

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 3, 2023 or December 28, 2021. For federal and state income tax purposes, the Company’s 2019 through 2021 tax years remain open for examination by the authorities under the normal three year statute of limitations. Should the Company utilize any of its U.S. or state NOLs, the tax year to which the original loss relates will remain open to examination.