14. Income Taxes

The following table summarizes the income (loss) from continuing operations, before income taxes, net equity in earnings of affiliates for Fiscal 2015, Fiscal 2014 and Fiscal 2013:

	Fiscal 2015		Fiscal 2014		Fiscal 2013
United States	$	4,284	$	8,692	$	(10,679	)
Foreign		9,545		15,572		12,214
	$	13,829	$	24,264	$	1,535

Income Tax Provision

The income tax expense (benefit) from continuing operations, for Fiscal 2015, Fiscal 2014 and Fiscal 2013 consists of the following:

	Fiscal 2015			Fiscal 2014		Fiscal 2013
Current tax expense
US Federal	$	—		$	—	$	—
State and local		248			239		152
Foreign		1,889			2,388		2,135
Total current tax expense		2,137			2,627		2,287
Deferred tax expense (benefit)
US Federal		(15,541	)		4,117		157
State and local		(422	)		247		28
Foreign		(342	)		—		—
Total deferred tax expense (benefit)		(16,305	)		4,364		185
Income tax expense (benefit)	$	(14,168	)	$	6,991	$	2,472

Effective and Statutory Rate Reconciliation

The following table summarizes a reconciliation of income tax expense (benefit) for continuing operations, calculated at the US statutory federal income tax rate of 35%, to total income tax expense (benefit) for Fiscal 2015, Fiscal 2014 and Fiscal 2013:

	Fiscal 2015			Fiscal 2014			Fiscal 2013
Income tax expense at federal statutory rate	$	4,840		$	8,549		$	537
Increases/(Decreases) due to:
State income taxes, net of federal benefit		(261	)		472			656
Puerto Rico loss		(19	)		—			—
Share-based compensation		265			258			300
Employment credits		961			858			688
Change in estimate, primarily related to transaction costs		527			—			(1,508	)
Differences due to other non-deductible expenses		216			(635	)		162
Foreign tax rate differential		(1,750	)		(3,138	)		(2,187	)
Employment credits generated		(2,746	)		(2,146	)		(1,965	)
Unremitted earnings		(13,198	)		5,063			3,331
Change in valuation allowance		(2,677	)		(1,715	)		2,458
Out-of-period adjustment		(308	)		(575	)		—
Other		(18	)		—			—
Total income tax expense (benefit), net	$	(14,168	)	$	6,991		$	2,472

During the first quarter of Fiscal 2015, the Company recognized a $308 discrete tax benefit related to a true-up of the deferred tax asset on Fiscal 2014 alternative minimum tax credits.

During the fourth quarter of Fiscal 2014, the Company identified errors of $575 in consolidated income tax expense for Fiscal 2013, and $575 in consolidated comprehensive loss for the period May 24, 2012 to December 30, 2012. The errors related to accounting entries made in connection with deferred tax assets recorded on cumulative translation adjustments in Fiscal 2012, and the subsequent recording of a valuation allowance on such adjustments in Fiscal 2013. The Company corrected these errors in the fourth quarter of Fiscal 2014, which had an effect of reducing income tax expense by $575, and reducing other comprehensive income by $575 for Fiscal 2014. The Company does not believe these adjustments are material to the consolidated financial statements for Fiscal 2014 or to the consolidated financial statements of any prior period.

The significant components of the difference between the statutory tax rate and the annual effective tax rate are attributable to change in assertion regarding unremitted foreign earnings, the change in valuation allowances, FICA tip credits, statutory tax rate differential between foreign jurisdictions and the US, change in prior year estimates related to the deductible amount of costs incurred in connection with the IPO, nondeductible expenses, and state taxes.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss and tax credit carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered.

Significant components of deferred tax assets and liabilities as of January 3, 2016 and December 28, 2014 are as follows:

	January 3, 2016			December 28, 2014
Deferred tax assets
Deferred revenue	$	1,044		$	533
Tenant allowances		4,839			2,637
Capitalized transaction costs		2,539			3,421
Deferred rent liability		2,402			1,627
Net operating loss carryforwards		8,824			11,937
FICA tip credit carryforward		8,164			5,612
Cumulative translation adjustment		—			3,203
Favorable/Unfavorable leases		380			461
Accrued expenses		892			560
Share-based compensation		2,381			31
AMT credit carryforward		556			—
Other		42			107
Valuation allowance		—			(2,837	)
Total deferred tax assets		32,063			27,292
Deferred tax liabilities
Tax depreciation in excess of book depreciation		(10,839	)		(8,799	)
Goodwill and intangible assets		(33,915	)		(28,872	)
Debt costs		—			(1,537	)
Unremitted foreign earnings		—			(17,080	)
Other		—			—
Total deferred tax liabilities		(44,754	)		(56,288	)
Net deferred tax liabilities	$	(12,691	)	$	(28,996	)

The Company has net deductible goodwill for income tax purposes of $81,326 at January 3, 2016.

The Company’s $8,824 deferred tax asset related to net operating loss carryforwards is net of unrealized excess tax benefits related to share-based compensation. The impact of the excess tax benefit will be recognized in additional paid-in capital upon utilization of the Company’s net operating loss and tax credits carryforward.

The Company has gross US federal net operating loss carryforwards in the amount of $21,937 at January 3, 2016 and $31,467 at December 28, 2014. These carryforwards will begin to expire in 2032. The Company has foreign net operating losses of $576 at January 3, 2016 which will begin to expire in 2024. The Company has state net operating loss carryforwards in various states in amounts ranging from $252 to $3,398 that expire over the next 19 years. The Company has AMT credit carryforwards of $556 that can be carried forward indefinitely, as well as federal general business tax credit carryforwards of approximately $8,164 which begin to expire in 2032. Immediately before expiration, unused credits may be converted to NOL deductions and carried forward an additional 20 years.

On July 21, 2012, the Company purchased 100% of the interest in Fogo de Chão Churrascaria (Holdings) LLC, a Delaware limited liability company from FC Holdings Inc. This event constitutes a change in ownership for purposes of Section 382 of the Internal Revenue Code (“IRC”). As a result, the amount of pre-change net operating losses (“NOLs”) and other tax attributes that are available to offset future taxable income are subject to an annual limitation. The annual limitation is based on the value of the corporation as of the effective date of the acquisition. As of December 28, 2014, the Company’s cumulative limitation was in excess of NOLs subject to Section 382 of the IRC. The Company utilized all NOLs subject to Section 382 in its December 28, 2014 Federal tax return. Subsequent ownership changes may result in further limitation on the Company’s ability to utilize existing NOLs and other tax attributes.

The Company had historically provided deferred taxes under ASC 740-30-25, formerly APB 23, for the presumed repatriation to the US earnings from the Company’s Brazilian subsidiaries. In June 2015, the Company asserted that undistributed net earnings of its Brazilian subsidiaries would be indefinitely reinvested in operations outside the US. This was primarily driven by a reduction in debt service costs on a forward basis as a result of the IPO. Additionally, future US cash projections and the Company’s intent to continue investing in restaurants in foreign jurisdictions with cash generated in those jurisdictions, drove the Company’s decision to make the assertion. As a result of the change in assertion, the Company reduced its deferred tax liabilities related to undistributed foreign earnings by $13,877.

The Company considers the undistributed earnings related to its Brazilian subsidiaries to be indefinitely reinvested and are expected to continue to be indefinitely reinvested. Accordingly, no provision for US income and additional foreign taxes has been recorded on aggregate undistributed earnings of $33,370 as of January 3, 2016. If there is a change in assertion regarding indefinite reinvestment of the undistributed earnings of the Company’s Brazilian subsidiaries the Company would record a deferred tax liability attributable to those undistributed earnings in the amount of approximately $11,800. As of January 3, 2016, $11,120 in cash and cash equivalents is held in Brazil by the Company’s Brazilian subsidiaries and would be subject to additional taxes if repatriated to the US.

ASC 740 requires that the Company reduce its deferred income tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset 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 are deductible. In 2015, the Company made the decision to release its valuation allowance against its net deferred tax asset, net of deferred tax liabilities, related to assets with indefinite lives. The decision to release the valuation allowance was triggered in conjunction with the IPO. Reduced debt service costs and historic cumulative earnings (US pretax income plus permanent tax differences) were all sources of positive evidence that led the Company to believe that it was more likely than not that it would be able to realize its net deferred tax assets. The Company recorded a valuation allowance of $2,837 as of December 28, 2014 against its net deferred tax assets that are in excess of the deferred tax liabilities (excluding “naked credits”). Naked credits refer to deferred tax liabilities associated with the tax amortization of goodwill and indefinite lived intangible assets that are not amortized for financial reporting purposes. No valuation allowance was recorded as of January 3, 2016.

Changes in the valuation allowance for deferred tax assets were as follows:

	Fiscal 2015			Fiscal 2014
Valuation allowance as of the beginning of the year	$	2,837		$	4,030
Charge as (benefit) expense to income tax provision		(2,837	)		(2,290	)
Changes to other comprehensive income		—			1,097
Valuation allowance as of end of year	$	—		$	2,837

As of January 3, 2016, the Company had no unrecognized tax benefits. The Company is subject to income taxes in the US federal jurisdiction and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company has considered whether there are any uncertain tax positions, and has determined that there are no such uncertain tax positions.

The Company is potentially subject to income tax audits in numerous jurisdictions in the US and internationally until the applicable statute of limitations expires. The following is a summary of tax years potentially subject to examination in the significant tax and business jurisdictions in which the company operates:

Jurisdiction

Tax Years

Subject to

Examination

Brazil

2009 - 2014

United States (Federal, state, local)

2012 - 2014