18. Income Taxes

Through the April 17, 2011, the Company’s consolidated financial statements reflect a charge for federal and state income taxes as if Henry’s had been subject to tax on a separate company basis during the periods presented. Subsequent to April 17, 2011, the Company’s (provision) benefit for income taxes is based on the new tax return filing group.

In July 2013, in connection with the IPO, the Company converted from a limited liability company to a C-corporation. During the period from April 17, 2011 until the corporate conversion, the Company had elected to be taxed as a corporation for income tax purposes.

Income Tax (Provision) Benefit

Income tax (provision) benefit consists of the following:


	Year Ended
	December 29, 2013			December 30, 2012			January 1, 2012
U.S. Federal—current	$	(15,684	)	$	(309	)	$	(1,433	)
U.S. Federal—deferred		(12,203	)		(12,687	)		17,496

U.S. Federal—total		(27,887	)		(12,996	)		16,063
State—current		(3,299	)		(1,105	)		(588	)
State—deferred		(1,555	)		(1,166	)		2,256

State—total		(4,854	)		(2,271	)		1,668

Total (provision) benefit	$	(32,741	)	$	(15,267	)	$	17,731

Tax Rate Reconciliation

Income tax (provision) benefit differed from the amounts computed by applying the U.S. federal income tax rate to pretax income as a result of the following:


	Year Ended
	December 29, 2013			December 30, 2012			January 1, 2012
Federal statutory rate		35.00	%		35.00	%		35.00	%
Increase in income taxes resulting from:
State income taxes, net of federal benefit		5.18			5.17			4.03
Nondeductible transaction costs		—			3.38			—
Other, net		(1.23	)		0.36			0.22

Effective tax rate		38.95	%		43.91	%		39.25	%

The effective income tax rate decreased to 38.95% in 2013 from 43.91% in 2012 as a result of increased tax credits and charitable contributions for 2013 and the non-deductible transaction costs incurred in 2012 related to the Sunflower Transaction. The effective income tax rate increased to 43.91% in 2012 from 39.25% in 2011 as a result of the non-deductible transaction costs incurred in 2012 related to the Sunflower Transaction.

Excess tax benefits associated with stock option exercises and antidilution payments made to optionholders are credited to stockholders’ equity. The Company uses the tax law ordering approach of intraperiod allocation to allocate the benefit of windfall tax benefits based on provisions in the tax law that identify the sequence in which those amounts are utilized for tax purposes. The income tax benefits resulting from stock awards that were credited to stockholders’ equity were $17.8 million, $0.1 million and $0.0 for the years ended December 29, 2013, December 30, 2012 and January 1, 2012, respectively.

Deferred Taxes

Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:


	As Of
	December 29, 2013			December 30, 2012
Deferred tax assets
Employee benefits	$	14,677		$	13,731
Net operating loss carryforwards and tax credits		13,263			10,945
Lease related		63,512			54,798
Other accrued liabilities		6,714			5,048
Intangible assets		6,496			17,917
Charitable contribution carryforward		2,204			—
Inventories and other		538			1,401

Total gross deferred tax assets		107,404			103,840
Deferred tax liabilities
Depreciation and amortization		(73,991	)		(56,670	)

Total gross deferred tax liabilities		(73,991	)		(56,670	)

Net deferred tax asset	$	33,413		$	47,170

A valuation allowance is established for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefits, or that the realization of future deductions is uncertain.

If realized, $3.6 million of net operating loss carry forwards will be recognized as a benefit through additional paid-in capital. Management performs an assessment over future taxable income to analyze whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company has evaluated all available positive and negative evidence and believes it is probable that the deferred tax assets will be realized and has not recorded a valuation allowance against the Company’s deferred tax assets as of December 29, 2013 and December 30, 2012.

At December 29, 2013 and December 30, 2012, the Company has approximately $36.6 million and $28.4 million of federal net operating loss carryforwards, respectively, which are available to offset future federal taxable income from 2028 through 2033. The Company has net operating loss carryforwards for state income tax purposes of $8.4 million and $7.8 million as of December 29, 2013 and December 30, 2012, respectively, which are available to offset future state taxable income from 2014 through 2033. The utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year. The Company has alternative minimum tax credits of $0.4 million which are available to offset future income taxes. These credits have no expiration date. The Company has general business credits of $1.0 million which are available to offset future income taxes until 2032 through 2033.

Federal tax laws impose restrictions on the utilization of net operating loss carryforwards and tax credit carryforwards in the event of an “ownership change,” as defined by federal income tax code. Such an ownership change occurred on May 29, 2012, concurrent with the acquisition of Sunflower. The Company’s ability to utilize net operating loss carryforwards and tax credit carryforwards is subject to restrictions pursuant to these provisions. Utilization of the federal net operating loss and tax credits will be limited annually and any unused limitation in a given year may be carried forward to the next year.

In September 2013 the Internal Revenue Service issued final regulations related to tangible property, which govern when a taxpayer must capitalize or deduct expenses for acquiring, maintaining, repairing and replacing tangible property. The regulations are effective for tax years beginning January 1, 2014, however early adoption is permitted. The Company has analyzed the impacts of the tangible property regulations, and has determined we are in compliance with the regulations. The adoption of the regulations will not have a significant effect on the Company’s consolidated financial statements.

The Company applies the authoritative accounting guidance under ASC 740 for the recognition, measurement, classification and disclosure of uncertain tax positions taken or expected to be taken in a tax return.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:


	As Of
	December 29, 2013		December 30, 2012		January 1, 2012
Beginning balance	$	150	$	—	$	307
Additions based on tax positions related to the current year		260		150		—
Reductions for tax positions of prior years		—		—		(307	)

Net deferred tax asset (liability)	$	410	$	150	$	—

At December 29, 2013 and December 30, 2012 the Company had unrecognized tax benefits of $0.4 million and $0.2 million (tax effected) that would impact the effective tax rate if recognized.

The Company’s policy is to recognize accrued interest and penalties as a component of income tax expense.

The Company anticipates an increase in the total amount of unrecognized tax benefits during the next twelve months related to depreciation for transaction cost allocation in the amount of $0.2 million.

The Company files income tax returns with federal and state tax authorities within the United States. The statute of limitations remains open for federal and state income tax examinations for the tax years 2011 and 2012. The statute of limitations remains open for Sunflower’s pre-merger federal tax returns for 2010 through 2012 and state tax returns for 2008 through 2012.