Income Taxes

Income before income taxes is set forth below:



	Year Ended
	2018		2017		2016
Domestic	$	560,776	$	86,892	$	192,082
Foreign (a)	14,140		14,127		9,608
	$	574,916	$	101,019	$	201,690

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(a)	Excludes foreign income of domestic subsidiaries.

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



	Year Ended
	2018			2017			2016
Current:
U.S. federal	$	(109,078	)	$	(13,092	)	$	(75,167	)
State	(2,661		)	(4,055		)	(5,805		)
Foreign	(9,630		)	(9,173		)	(5,307		)
Current tax provision	(121,369		)	(26,320		)	(86,279		)
Deferred:
U.S. federal	5,071			127,592			7,975
State	441			(7,729		)	6,733
Foreign	1,056			(533		)	(495		)
Deferred tax benefit	6,568			119,330			14,213
Income tax (provision) benefit	$	(114,801	)	$	93,010		$	(72,066	)

Deferred tax assets (liabilities) are set forth below:



	Year End
	December 30, 2018			December 31, 2017
Deferred tax assets:
Net operating loss and credit carryforwards	$	59,690		$	66,770
Unfavorable leases	35,801			40,544
Deferred revenue	23,904			328
Deferred rent	16,807			14,862
Accrued expenses and reserves	14,840			9,673
Accrued compensation and related benefits	14,804			17,904
Other	5,016			3,977
Valuation allowances	(42,175		)	(47,295		)
Total deferred tax assets	128,687			106,763
Deferred tax liabilities:
Intangible assets	(324,394		)	(333,708		)
Owned and leased fixed assets, net of related obligations	(47,021		)	(47,702		)
Other	(26,432		)	(24,406		)
Total deferred tax liabilities	(397,847		)	(405,816		)
	$	(269,160	)	$	(299,053	)

Changes in the Company’s deferred tax asset and liability balances were primarily the result of the adoption of new guidance for revenue recognition. See “New Accounting Standards Adopted” in Note 1 for further information.

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 affected 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 are 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 recorded a discrete net tax benefit of $140,379 during 2017. This net benefit primarily consisted 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 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 2017.

In our continued analysis of the Tax Act, we adjusted our provisional amounts and recorded a discrete net tax expense of $2,159 during 2018. This includes a net expense of $2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities, a net expense of $991 related to the limitations on the deductibility of certain executive compensation and $28 of state income tax, partially offset by $1,286 for the net benefit of foreign tax credits. At December 30, 2018, we finalized our policy and have elected to use the period cost method for GILTI provisions and therefore have not recorded deferred taxes for basis differences expected to reverse in future periods.

Based on certain provisions contained in the Tax Act, the unrepatriated earnings of foreign subsidiaries, primarily Canadian, are no longer considered permanently invested outside of the U.S. As of December 30, 2018, we have provided a deferred foreign tax provision of $1,985 on these unrepatriated earnings.

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	$	9,267	2022-2029
State tax credits	559		2020-2023
Foreign tax credits of non-U.S. subsidiaries	2,674		Not applicable
Total	$	12,500

Net operating loss carryforwards:
State and local net operating loss carryforwards	$	1,204,260	2019-2035
Foreign net operating loss carryforwards	216		2023-2026
Total	$	1,204,476

The Company’s valuation allowances of $42,175 and $47,295 as of December 30, 2018 and December 31, 2017, respectively, relate to foreign and state tax credit carryforwards and net operating loss carryforwards. Valuation allowances decreased $5,120 and $5,697 during 2018 and 2016, respectively, and increased $35,895 during 2017, primarily as a result of the Tax Act and our system optimization initiative described in Note 3. 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.

The current portion of refundable income taxes was $14,475 and $26,262 as of December 30, 2018 and December 31, 2017, respectively, and is included in “Accounts and notes receivable, net.” There were no long-term refundable income taxes as of December 30, 2018 and December 31, 2017.

The reconciliation of income tax computed at the U.S. federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to reported income tax is set forth below:



	Year Ended
	2018 (a)			2017 (a)			2016
Income tax provision at the U.S. federal statutory rate	$	(120,732	)	$	(35,357	)	$	(70,592	)
State income tax provision, net of U.S. federal income tax effect	(221		)	(6,451		)	(3,767		)
Federal rate change	—			164,893			—
Prior years’ tax matters (b)	(9,970		)	15,964			—
Excess tax benefits from share-based compensation	10,250			5,196			—
Domestic tax planning initiatives	—			4,282			—
Foreign and U.S. tax effects of foreign operations	(856		)	2,408			2,278
Valuation allowances (b) (c)	5,120			(35,895		)	4,915
Non-deductible goodwill (d)	(41		)	(15,458		)	(6,409		)
Transition tax	—			(4,446		)	—
Unrepatriated earnings	(326		)	(1,801		)	—
Non-deductible expenses and other	1,975			(325		)	1,509
	$	(114,801	)	$	93,010		$	(72,066	)

_______________

(a)

2018 includes the following impacts associated with the Tax Act: (1) a net expense of $2,426 related to the impact of the corporate rate reduction on our net deferred tax liabilities, (2) a net expense of $991 related to the limitations on the deductibility of certain executive compensation, (3) a net expense of $28 of state income tax and (4) a net benefit of $1,286 related to foreign tax credits. 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)

In 2018, includes expense of $9,542 related to the Tax Act, which was partially offset by a $7,535 reduction in valuation allowances. In 2017, primarily related to certain state net operating loss carryforwards, previously considered worthless, that existed at the beginning of the year. The Company changed its judgment during 2017 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 an increase in valuation allowance of $13,667, net of federal benefit.


(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 gain (loss) on sales of restaurants in 2018, 2017 and 2016 under our system optimization initiative was non-deductible for tax purposes. See Note 3 for 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 2014 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 30, 2018, the Company had unrecognized tax benefits of $27,632, which, if resolved favorably would reduce income tax expense by $23,497. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:



	Year End
	December 30, 2018			December 31, 2017			January 3, 2016
Beginning balance	$	28,848		$	19,545		$	21,224
Additions:
Tax positions of current year	3,874			8,251			306
Tax positions of prior years	2,598			1,704			440
Reductions:
Tax positions of prior years	(7,553		)	(295		)	(2,126		)
Settlements	(21		)	(34		)	(42		)
Lapse of statute of limitations	(114		)	(323		)	(257		)
Ending balance	$	27,632		$	28,848		$	19,545

The addition of unrecognized tax benefits in 2018 was primarily related to a position taken on state returns regarding the sale of Inspire Brands, and the reduction of unrecognized benefits in 2018 was primarily related to settlements with various taxing jurisdictions, including amended returns that were filed in 2017. 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 2019, we believe it is reasonably possible the Company will reduce unrecognized tax benefits by up to $7,731 due primarily to the lapse of statutes of limitations.

During 2018, 2017 and 2016, the Company recognized $(12), $161 and $75 of (income) expense for interest and $(309), $(106) and $25 of (income) expense for penalties, respectively, related to uncertain tax positions. The Company has $1,428 and $1,451 accrued for interest and $199 and $509 accrued for penalties as of December 30, 2018 and December 31, 2017, respectively.