Income Taxes

12 Months Ended

Jan. 01, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income (loss) before income taxes consisted of:

	Fiscal Years Ended
	January 1, 2023		January 2, 2022		January 3, 2021
Domestic	$	(49,910)	$	(49,348)	$	(47,080)
Foreign	41,747		45,250		(4,748)
Loss before income taxes	$	(8,163)	$	(4,098)	$	(51,828)

Domestic income (loss) before income taxes includes unallocated corporate costs, which include general corporate expenses.

The components of the provision for income taxes are as follows:

	Fiscal Years Ended
	January 1, 2023		January 2, 2022		January 3, 2021
Current:
Federal	$	—	$	—	$	—
State	1,033		347		156
International	13,816		13,894		8,992
Total current	$	14,849	$	14,241	$	9,148
Deferred and other:
Federal	$	(13,960)	$	4,310	$	(8,844)
State	4,280		(5,739)		13,472
International	(4,557)		(2,067)		(4,664)
Total deferred and other	$	(14,237)	$	(3,496)	$	(36)
Income tax expense	$	612	$	10,745	$	9,112

A reconciliation of the statutory U.S. federal income tax rate and the Company’s effective tax rate is as follows:

	Fiscal Years Ended
	January 1, 2023		January 2, 2022		January 3, 2021
Statutory federal rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal benefit	12.6		(2.8)		4.1
Foreign operations	(66.8)		(12.9)		(10.7)
Change in valuation allowance	24.9		14.3		(34.9)
Noncontrolling interest	17.2		46.8		2.6
Impact of uncertain tax positions	62.2		9.1		(1.3)
Other permanent differences	(1.5)		(14.2)		1.3
Transaction costs	(0.1)		(5.1)		(0.8)
Deferred adjustments	(48.7)		(96.1)		(0.9)
Share-based compensation	(30.3)		(217.4)		—
Other	2.0		(4.9)		2.0
Effective tax rate	(7.5)	%	(262.2)	%	(17.6)	%

The Company establishes valuation allowances for deferred income tax assets in accordance with GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not.

The Company recognizes deferred income tax assets and liabilities based upon its expectation of the future tax consequences of temporary differences between the income tax and financial reporting bases of assets and liabilities. Deferred tax liabilities generally represent tax expense recognized for which payment has been deferred, or expenses which have been deducted in the Company’s tax returns, but which have not yet been recognized as an expense in the financial statements. Deferred tax assets generally represent tax deductions or credits that will be reflected in future tax returns for which the Company has already recorded a tax benefit in the Consolidated Financial Statements.

The Company continues to assert permanent reinvestment with respect to its initial basis differences of international affiliates but does not assert indefinite reinvestment on the earnings of the foreign subsidiaries with the exception of its subsidiaries in Canada. Accordingly, no deferred taxes have been provided for with regard to the Company’s initial basis difference in international affiliates. Due to the complexities of tax law in the respective jurisdictions, it is not practicable to estimate the tax liability that might be incurred if such earnings were remitted to the U.S. The Company has not established a deferred tax liability for the earnings of the foreign subsidiaries as any distributions made from those jurisdictions are expected to be made in a tax neutral manner.

The tax effects of temporary differences are as follows:

	As of
	January 1, 2023		January 2, 2022
Deferred income tax assets:
Intangible assets	$	1,499	$	1,665
Accrued compensation	3,019		4,330
Insurance accruals	2,296		1,934
Share-based compensation	2,483		2,786
Deferred revenue	2,016		1,735
Transaction costs	1,481		1,397
Disallowed interest expense	20,685		10,527
Lease liabilities	107,850		101,629
Foreign net operating loss carryforward	2,147		2,565
Federal net operating loss carryforward	27,086		22,493
Federal tax credits	15,121		13,913
State net operating loss and credit carryforwards	11,888		11,169
Unrealized loss on foreign currency translation	—		3,667
Other	11,333		9,567
Gross deferred income tax assets	208,904		189,377
Valuation allowance	(27,940)		(29,972)
Deferred income tax assets, net of valuation allowance	$	180,964	$	159,405
Deferred income tax liabilities:
Intangible assets	$	(149,928)	$	(147,621)
Subsidiary investments	(12,181)		(8,038)
Property and equipment	(23,912)		(14,254)
Foreign reacquired franchise rights	(31,677)		(37,600)
Lease right of use assets	(97,076)		(93,250)
Unrealized income on foreign currency translation	(4,750)		—
Other	(1,831)		(3,683)
Gross deferred income tax liabilities	(321,355)		(304,446)
Net deferred income tax liabilities	$	(140,391)	$	(145,041)

The presentation of deferred income taxes on the Consolidated Balance Sheets is as follows:

	As of
	January 1, 2023		January 2, 2022
Included in:
Other assets	$	2,733	$	377
Deferred income taxes, net	(143,124)		(145,418)
Net deferred income tax liabilities	$	(140,391)	$	(145,041)

As of January 1, 2023, the Company had Net Operating Loss (“NOL”) carryforwards of approximately $249.8 million for U.S. state tax purposes and $129.0 million for U.S. federal tax purposes. As of January 2, 2022, the Company had NOL carryforwards of approximately $327.5 million for U.S. state tax purposes and $107.1 million for U.S. federal tax purposes. U.S. federal NOL carryforwards are eligible to be carried forward indefinitely. A portion of the Company’s U.S. state tax carryforwards will begin to expire in the current year. As of January 1, 2023 and January 2, 2022 the Company had foreign NOL carryforwards of approximately $7.5 million and $8.5 million, respectively. As of January 1, 2023, $4.9 million of NOL carryforwards have a 10-year carryover period and the remaining $2.7 million have either a 20-year carryover period or no expiration.

As of January 1, 2023, the Company had various tax credit carryforwards of $15.0 million for U.S. federal purposes and none for U.S. state purposes. As of January 2, 2022, the Company had various tax credit carryforwards of $13.9 million for U.S. federal purposes and none for U.S. state purposes. If not utilized, the credits can be carried forward between 10 and 20 years. A portion of the U.S. tax credit carryforwards will begin to expire in fiscal 2023. If certain substantial changes in the entity’s ownership occur, there would be an annual limitation on the amount of the NOLs and credits that can be utilized.

The valuation allowances of $27.9 million and $30.0 million as of January 1, 2023 and January 2, 2022 respectively, represent the portion of its deferred tax assets that the Company does not believe would more likely than not be realized in the future. Of the $27.9 million as of January 1, 2023, $1.5 million is for KK Mexico loss carryforwards, $11.9 million is for U.S. state tax carryforwards, and $14.5 million is for U.S. foreign tax credits and other business credits, for which sufficient taxable income is not expected to be generated. The change in valuation allowance is primarily attributable to the expiration of net operating losses, thus resulting in a reduction of the corresponding valuation allowance. Of the $30.0 million as of January 2, 2022, $2.5 million is for KK Mexico losses and capital loss carryforwards, $13.2 million is for U.S. state tax carryforwards, and $14.2 million is for U.S. foreign tax credits and other business credits, for which sufficient taxable income is not expected to be generated.

Realization of net deferred tax assets generally is dependent on generation of taxable income in future periods. While the Company believes its forecast of future taxable income is reasonable, actual results will inevitably vary from management’s forecasts. Such variances could result in adjustments to the valuation allowance on deferred tax assets in future periods, and such adjustments could be material to the financial statements.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act made various tax law changes including among other things (i) modifications to the federal NOL carryback rules, (ii) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest, (iii) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), and (iv) permitted the deferral of the employer’s portion of social security taxes. The Company was able to take additional deductions as a result of the CARES Act, resulting in additional NOLs for the fiscal years ended January 1, 2023 and January 2, 2022. The Company was able to defer $7.3 million of social security taxes to future years during the fiscal year ended January 3, 2021. During the fiscal year ended January 2, 2022, the Company repaid half of the deferred social security taxes and repaid the remaining deferred social security taxes on January 3, 2023.

The Company files income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. For U.S. federal tax purposes, tax years prior to the year ended December 31, 2018 are closed for assessment purposes; however, tax years in which an NOL was generated will remain open for examination until the statute of limitations will close on tax years utilizing NOL carryforwards to reduce the tax due. Generally, the statute of limitations will close on tax years utilizing NOL carryforwards three years subsequent to the utilization of NOLs. For state purposes, the statute of limitations remains open in a similar manner for states where the Company generated NOLs.

Income tax payments, net of refunds, were $16.7 million, $13.6 million, and $9.3 million in the fiscal years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively.

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:

	As of
	January 1, 2023		January 2, 2022
Unrecognized tax benefits at beginning of year	$	18,478	$	17,341
Increases related to positions taken in the current year	—		1,383
Increases (decreases) related to positions taken in prior years	(221)		(246)
Decreases related to positions taken in prior years due to lapse of statute	(4,744)		—
Unrecognized tax benefits at end of year	$	13,513	$	18,478

Approximately all of the aggregate $13.5 million and $18.5 million of unrecognized income tax benefits as of January 1, 2023 and January 2, 2022, respectively, would, if recognized, impact the annual effective tax rate. The Company does not believe that changes in its uncertain tax benefits will result in a material impact during the next 12 months.

The Company’s policy is to recognize interest and penalties related to income tax issues as components of income tax expense. The Company’s Consolidated Balance Sheets reflect approximately $1.9 million of accrued interest and penalties as of both January 1, 2023 and January 2, 2022. Interest and penalties were not material during the years presented in the Company’s Consolidated Statements of Operations.