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INCOME TAXES
 12 Months Ended
Dec. 28, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES INCOME TAXESShake Shack is the sole managing member of SSE Holdings and, as a result, consolidates the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss
generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. The Company is also subject to withholding taxes in foreign jurisdictions.
Income Tax Expense
The components of Loss before income taxes were as follows:
202220212020
Domestic$(49,454)$(38,833)$(59,873)
Foreign25,169 21,498 14,396 
Loss before income taxes$(24,285)$(17,335)$(45,477)
The components of Income tax expense (benefit) were as follows:
20222021¹2020
Current income taxes:
Federal$— $— $— 
State and local1,427 275 190 
Foreign3,612 2,880 1,223 
Total current income taxes5,039 3,155 1,413 
Deferred income taxes:
Federal(4,939)(11,921)(12,638)
State and local1,582 1,542 11,282 
Total deferred income taxes(3,357)(10,379)(1,356)
Income tax expense (benefit)$1,682 $(7,224)$57 
(1)For fiscal 2021, certain amounts were reclassified for consistent presentation with the current year.
Reconciliations of Income tax expense (benefit) computed at the U.S. federal statutory income tax rate to the recognized Income tax expense (benefit) and the U.S. statutory income tax rate to our effective tax rates were as follows:
20222021¹2020
Expected U.S. federal income taxes at statutory rate$(5,100)21.0 %$(3,641)21.0 %$(9,550)21.0 %
State and local income taxes, net of federal benefit2,103 (8.7)%2,539 (14.6)%5,776 (12.7)%
Foreign withholding taxes3,612 (14.9)%2,880 (16.6)%1,223 (2.7)%
Tax credits(5,969)24.6 %(3,655)21.1 %(1,533)3.4 %
Non-controlling interest122 (0.5)%(350)2.0 %537 (1.2)%
Remeasurement of deferred tax assets in connection with other tax rate changes225 (0.9)%1,034 (6.0)%5,433 (11.9)%
Change in valuation allowance4,955 (20.4)%(6,059)35.0 %(2,264)5.0 %
Other1,734 (7.1)%28 (0.2)%435 (1.0)%
Income tax expense (benefit)$1,682 (6.9)%$(7,224)41.7 %$57 (0.1)%
(1)For fiscal 2021, certain amounts were reclassified for consistent presentation with the current year.
Shake Shack's effective income tax rates for fiscal 2022, fiscal 2021 and fiscal 2020 were (6.9)%, 41.7% and (0.1)%, respectively. The decrease in our effective income tax rate from fiscal 2021 to fiscal 2022 was primarily driven by additional expense related to an increase in valuation allowance, increase in foreign tax expense, net expense related to equity-based
compensation, partially offset by higher tax credits. The increase in our effective income tax rate from fiscal 2020 to fiscal 2021 was primarily driven by the increase in the income tax benefit from the release of the valuation allowance and higher tax credits, partially offset by higher foreign tax expense.
Deferred Tax Assets and Liabilities
The components of deferred tax assets and liabilities were as follows:
December 28
2022
December 29 2021(1)
Deferred tax assets:
Investment in partnership$89,660 $116,639 
Tax Receivable Agreement64,218 63,983 
Operating lease liability4,376 3,873 
Financing lease liability61 63 
Deferred revenue167 150 
Equity-based compensation380 263 
Net operating loss carryforwards134,989 108,207 
Tax credits19,257 13,297 
Other assets638 574 
Total gross deferred tax assets313,746 307,049 
Valuation allowance(9,560)(5,173)
Total deferred tax assets, net of valuation allowance304,186 301,876 
Deferred tax liabilities:
Property and equipment(95)(21)
Operating lease right-of-use asset (3,488)(3,121)
Financing lease right-of-use asset (58)(61)
Other liabilities(7)(5)
Total gross deferred tax liabilities(3,648)(3,208)
Net deferred tax assets$300,538 $298,668 
(1)For fiscal 2021, certain amounts were reclassified for consistent presentation with the current year.
As of December 28, 2022, the Company's federal and state net operating loss carryforwards for income tax purposes were $558,397 and $303,323. If not utilized, $506,530 of the Company's federal net operating losses can be carried forward indefinitely, and the remainder will begin to expire in 2035. If not utilized $48,587 of the Company's state net operating loss carryforwards can be carried forward indefinitely, and the remainder will begin to expire in 2023. As of December 28, 2022, the Company had federal tax credit carryforwards of $18,660 which will begin to expire in 2025 and gross state tax credits of $756 which will begin to expire in 2023.
As described in Note 11, Stockholders' Equity, the Company acquired an aggregate of 142,601 LLC Interests in connection with the redemption of LLC Interests and activity relating to its stock compensation plan during fiscal 2022. The Company recognized a deferred tax liability in the amount of $1,137 associated with the basis difference in its investment in SSE Holdings upon acquisition of these LLC Interests. As of December 28, 2022, the total deferred tax asset related to the basis difference in the Company's investment in SSE Holdings was $89,660.
The Company evaluates the realizability of its deferred tax assets on a quarterly basis and establishes valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of December 28, 2022, the Company concluded, based on the weight of all available positive and negative evidence, that all of its deferred tax assets are
more likely than not to be realized, except New York City UBT and certain foreign tax credits no longer expected to be utilized before expiration. As such, a valuation allowance in the amount of $9,560 was recognized. The net change in valuation allowance for fiscal 2022 was an increase of $4,387. Refer to Schedule II, Valuation and Qualifying Accounts for additional information.
Uncertain Tax Positions
There were no reserves for uncertain tax positions as of December 28, 2022 and December 29, 2021. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and Organizational Transactions. The statute of limitations remains open for tax years beginning in 2015 for Shake Shack Inc. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2018 for SSE Holdings.
Tax Receivable Agreement
Pursuant to the Company's election under Section 754 of the Internal Revenue Code (the "Code"), the Company expects to obtain an increase in its share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. The Company plans to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. The Company intends to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that would otherwise be paid in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, the Company entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by the Company of 85% of the amount of any tax benefits that are actually realized, or in some cases are deemed to realize, as a result of (i) increases in the Company's share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). The Company expects to benefit from the remaining 15% of any tax benefits that may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or the Company. The rights of each member of SSE Holdings that is a party to the Tax Receivable Agreement, are assignable to transferees of their respective LLC Interests.
During fiscal 2022, the Company acquired an aggregate of 52,074 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of its investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. The Company recognized an additional liability in the amount of $844 for the TRA Payments due to the redeeming members, representing 85% of the aggregate tax benefits the Company expects to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on estimates of future taxable income. No payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement in fiscal 2022 and fiscal 2021. As of December 28, 2022, the total amount of TRA Payments due under the Tax Receivable Agreement was $234,893, of which no amount was included in Other current liabilities on the Consolidated Balance Sheets. Refer to Note 17, Commitments and Contingencies, for additional information relating to the liabilities under the Tax Receivable Agreement.
CARES Act
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit ("ERC") and retroactive technical correction of prior tax legislation for tax depreciation of certain qualified improvement property, among other changes. The CARES Act allows for a five-year carryback of federal NOLs generated in 2018 through 2020 and eliminates the 80% taxable income limitation by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018 through 2020.
As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company accounts for the ERC by analogy to International Accounting Standard ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance.
Subsequent to the second quarter of 2020, we began deferring the employer-paid portion of social security taxes; 50% of this was recognized at the end of 2021 and the other 50% and the end of 2022 as required by the CARES Act.
Inflation Reduction Act
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (“IRA”) into law. The IRA, among other things, enacted a 15% corporate minimum tax effective for tax years after December 31, 2022, a 1% tax on share repurchases after December 31, 2022, and created and extended certain tax-related energy incentives. The Company currently does not expect the tax-related provisions of the IRA to have a material impact on our financial results.