Income Taxes

Income from continuing operations before income taxes is set forth below:



	Year Ended
	2017		2016		2015
Domestic	$	86,892	$	192,082	$	208,827
Foreign (a)	14,127		9,608		25,301
	$	101,019	$	201,690	$	234,128


(a)	Excludes foreign income of domestic subsidiaries

The benefit from (provision for) income taxes from continuing operations is set forth below:



	Year Ended
	2017			2016			2015
Current:
U.S. Federal	$	(13,092	)	$	(75,167	)	$	(12,414	)
State	(4,055		)	(5,805		)	3,346
Foreign	(9,173		)	(5,307		)	(10,778		)
Current tax provision	(26,320		)	(86,279		)	(19,846		)
Deferred:
U.S. Federal	127,592			7,975			(53,916		)
State	(7,729		)	6,733			(21,375		)
Foreign	(533		)	(495		)	988
Deferred tax benefit (provision)	119,330			14,213			(74,303		)
Income tax benefit (provision)	$	93,010		$	(72,066	)	$	(94,149	)

Deferred tax assets (liabilities) are set forth below:



	Year End
	December 31, 2017			January 1, 2017
Deferred tax assets:
Net operating loss and credit carryforwards	$	66,770		$	44,733
Unfavorable leases	40,544			50,771
Accrued compensation and related benefits	17,904			31,994
Deferred rent	14,862			19,552
Accrued expenses and reserves	9,673			16,486
Other	4,305			9,293
Valuation allowances	(47,295		)	(11,400		)
Total deferred tax assets	106,763			161,429
Deferred tax liabilities:
Intangible assets	(333,708		)	(495,505		)
Owned and leased fixed assets, net of related obligations	(47,702		)	(89,251		)
Other	(24,406		)	(23,186		)
Total deferred tax liabilities	(405,816		)	(607,942		)
	$	(299,053	)	$	(446,513	)

Changes in the Company’s deferred tax asset and liability balances were primarily the result of the enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), described in detail below.

Major Tax Legislation

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that affects 2017, including but not limited to (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and (2) bonus depreciation that will allow for full expensing of qualified property.

The Tax Act also establishes new tax laws that will be effective for 2018, including but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%, (2) a new provision designed to tax global intangible low-taxed income (“GILTI”), (3) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, (4) a limitation on deductible interest expense and (5) limitations on the deductibility of certain executive compensation.

The Securities and Exchange Commission issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting. In accordance with the guidance, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue its accounting on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

In our initial analysis of the impact of the Tax Act, we have recorded a discrete net tax benefit of $140,379 for the year ended December 31, 2017. This net benefit primarily consists of a benefit of $164,893 for the impact of the corporate rate reduction on our net deferred tax liabilities, partially offset by a net expense of $22,209 for the international-related provisions, including the transition tax (and the related impact to our recorded valuation allowance) and deferred taxes recorded on foreign earnings previously considered permanently reinvested. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and the transition tax and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made and additional regulatory guidance that may be issued. The Company is not able to determine a provisional estimate for the GILTI tax and, therefore, has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.

The amounts and expiration dates of net operating loss and tax credit carryforwards are as follows:



	Amount		Expiration
Tax credit carryforwards:
U.S. federal foreign tax credits	$	15,962	2022-2024
State tax credits	555		2020-2023
Foreign tax credits of non-U.S. subsidiaries	3,023		Not applicable
Total	$	19,540

Net operating loss carryforwards:
State and local net operating loss carryforwards	$	1,165,832	2018-2035
Foreign net operating loss carryforwards	234		2023-2026
Total	$	1,166,066

The Company’s valuation allowances of $47,295 and $11,400 as of December 31, 2017 and January 1, 2017, respectively, relate to foreign and state tax credit carryforwards and net operating loss carryforwards. Valuation allowances increased $35,895 and $5,884 during 2017 and 2015, respectively, and decreased $5,697 during 2016, primarily as a result of the Tax Act and our system optimization initiative described in Note 2. The reduction in the U.S. corporate rate from 35% to 21% decreases our ability to utilize foreign tax credit carryforwards after 2017 and we expect them to expire unused. The relative presence of Company-operated restaurants in various states impacts expected future state taxable income available to utilize state net operating loss carryforwards. As the system optimization initiative has changed the Company’s relative presence in various states, the Company’s judgment about the ability to utilize certain state net operating loss carryforwards has likewise changed.

The current portion of refundable income taxes was $26,262 and $18,111 as of December 31, 2017 and January 1, 2017, respectively, and is included in “Accounts and notes receivable, net.” Long-term refundable income taxes are included in “Other assets” and amounted to $239 as of January 1, 2017. There were no long-term refundable income taxes as of December 31, 2017.

The reconciliation of income tax computed at the U.S. Federal statutory rate of 35% to reported income tax is set forth below:



	Year Ended
	2017 (a)			2016			2015
Income tax provision at the U.S. Federal statutory rate	$	(35,357	)	$	(70,592	)	$	(81,945	)
State income tax provision, net of U.S. Federal income tax effect	(6,451		)	(3,767		)	(7,234		)
Federal rate change	164,893			—			—
Prior years’ tax matters (b)	15,964			—			—
Excess tax benefits from share-based compensation	5,196			—			—
Domestic tax planning initiatives	4,282			—			—
Foreign and U.S. tax effects of foreign operations	2,408			2,278			4,389
Valuation allowances (b) (c)	(35,895		)	4,915			(6,075		)
Non-deductible goodwill (d)	(15,458		)	(6,409		)	(7,435		)
Transition tax	(4,446		)	—			—
Unrepatriated earnings	(1,801		)	—			—
Non-deductible expenses and other	(325		)	1,509			4,151
	$	93,010		$	(72,066	)	$	(94,149	)

_______________

(a)

2017 includes the following impacts associated with the Tax Act: (1) the revaluation of our U.S. net deferred tax liability at 21% resulting in a benefit of $164,893, (2) a full valuation allowance of $15,962 on our U.S. foreign tax credit carryforwards due to the decrease in the U.S. federal tax rate, resulting in the Company concluding it is more likely than not that we will not be able to utilize our carryforwards before they expire, (3) a one-time transition tax of $4,446, (4) deferred tax on unrepatriated earnings of $1,801 and (5) other net expenses of $2,305.

(b)

Primarily related to certain state net operating loss carryforwards, previously considered worthless, that existed at the beginning of the year. In 2017, the Company changed its judgment regarding the likelihood of the utilization of these carryforwards. Because of this change, the Company recognized a deferred tax asset of $16,643, net of federal benefit, which was partially offset by a valuation allowance of $13,667, net of federal benefit (included in the valuation allowances amount above).


(c)	2016 includes a $2,878 benefit related to the correction to a prior year identified and recorded in the first quarter of 2016.

(d)

Substantially all of the goodwill included in the net (loss) gain on sales of restaurants in 2017, 2016 and 2015 under our system optimization initiative was non-deductible for tax purposes. See Note 2 further information. 2016 includes a $3,837 federal benefit related to the correction to a prior year identified and recorded in the second quarter of 2016. The corresponding state benefit correction of $398 is included in the state income tax provision amount above.

The Company participates in the Internal Revenue Service (the “IRS”) Compliance Assurance Process (“CAP”). As part of CAP, tax years are examined on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. As such, our tax returns for fiscal years 2009 through 2016 have been settled. Certain of the Company’s state income tax returns from its 2013 fiscal year and forward remain subject to examination. We believe that adequate provisions have been made for any liabilities, including interest and penalties that may result from the completion of these examinations.

Unrecognized Tax Benefits

As of December 31, 2017, the Company had unrecognized tax benefits of $28,848, which, if resolved favorably would reduce income tax expense by $24,018. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



	Year End
	December 31, 2017			January 1, 2017			January 3, 2016
Beginning balance	$	19,545		$	21,224		$	25,715
Additions:
Tax positions of current year	8,251			306			927
Tax positions of prior years	1,704			440			476
Reductions:
Tax positions of prior years	(295		)	(2,126		)	(5,182		)
Settlements	(34		)	(42		)	(251		)
Lapse of statute of limitations	(323		)	(257		)	(461		)
Ending balance	$	28,848		$	19,545		$	21,224

The addition of unrecognized tax benefits in 2017 was primarily related to the filing of amended returns in various jurisdictions, as well as an unfavorable court decision which caused us to change our judgment about the technical merits of a filing position.

During 2018, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $6,617 due to expected settlements with taxing authorities and the lapse of statutes of limitations.

During 2017, 2016 and 2015, the Company recognized $161, $75 and $(1,627) of expense (income) for interest and $(106), $25 and $(15) of (income) expense for penalties, respectively, related to uncertain tax positions. The Company has approximately $1,451 and $1,296 accrued for interest and $509 and $615 accrued for penalties as of December 31, 2017 and January 1, 2017, respectively.