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Income Taxes

12 Months Ended

Dec. 29, 2020

20. Income Taxes

The provision for income taxes consisted of the following (in thousands):


	Fiscal Year
	2020		2019		2018

(Loss)/Income before income taxes	$	(356,036)	$	140,334	$	107,411
Income tax (benefit)/provision:
Current:
Federal	$	(38,414)	$	8,211	$	5,082
State		2,971		7,027		8,804
Total current		(35,443)		15,238		13,886
Deferred:
Federal		(52,607)		(3,695)		(4,549)
State		(14,621)		1,498		(961)
Total deferred		(67,228)		(2,197)		(5,510)
Total (benefit)/provision	$	(102,671)	$	13,041	$	8,376

The following reconciles the U.S. federal statutory rate to the effective tax rate:


	Fiscal Year
	2020		2019		2018

U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State and district income taxes, net of federal benefit	2.6		4.9		6.1
Credit for FICA taxes paid on tips	2.1		(12.8)		(16.5)
Other credits and incentives	0.3		(1.4)		(2.5)
Impact of net operating loss carryback	3.4		—		—
Deferred compensation	0.6		(1.7)		0.8
Equity compensation	(0.4)		(0.2)		(1.5)
Other	(0.8)		(0.5)		0.4
Effective tax rate	28.8	%	9.3	%	7.8	%

On March 27, 2020, the CARES Act was signed into law. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions allowing for the carryback of net operating losses generated in fiscal years 2018, 2019 and 2020 and technical amendments regarding the expensing of qualified improvement property (“QIP”). We expect to carry back our fiscal 2020 net operating loss and claim accelerated depreciation on QIP placed in service during fiscal 2018 and 2019. We expect to file carryback claims during fiscal 2021, and we estimate that these claims will generate cash refunds of approximately $36 million. The effects of these claims were included in our provision for income taxes using estimates based on the best information available at the time we prepared our consolidated financial statements. Legislative and judicial developments relating to these provisions may evolve and the actual effects of these claims may differ from our estimates, which, in turn, may result in adjustments to our effective tax rate.

The CARES Act also allowed eligible employers to defer the remittance of certain FICA taxes otherwise payable during calendar year 2020 and remit half of such deferred amounts on or before December 31, 2021 and half on or before December 31, 2022. We deferred approximately $36.6 million of FICA tax remittances under this provision. We plan to remit the first half of the deferred amount within 8.5 months of year-end 2020 (or by the date we file our 2020 tax return, if earlier) in order to secure a fiscal 2020 tax deduction. The effects of this planned remittance have been included in our fiscal 2020 provision for income taxes. We may, however, elect to remit the total amount of deferred FICA tax within 8.5 months of year-end 2020 (or by the date we file our 2020 tax return, if earlier), in which case the actual benefit of our net operating loss carryback will differ from our estimate. This, in turn, would result in an adjustment to our fiscal 2021 effective tax rate.

Following are the temporary differences that created our deferred tax assets and liabilities (in thousands):


	December 29, 2020		December 31, 2019
Deferred tax assets:
Staff member benefits	$	33,419	$	27,059
Insurance reserves		11,460		14,157
Operating lease liability		319,274		311,043
Deferred income		31,119		22,725
Tax credit carryforwards		37,107		15,754
Goodwill		15,632		—
Stock-based compensation		9,937		8,794
State and foreign net operating loss carryforwards		3,536		—
Derivative asset		1,409		—
Other		1,466		1,958
Subtotal		464,359		401,490
Less: Valuation allowance		(1,041)		(713)
Total	$	463,318	$	400,777

Deferred tax liabilities:
Property and equipment	$	(124,634)	$	(133,206)
Prepaid expenses		(7,027)		(8,819)
Inventory		(7,766)		(7,713)
Accrued rent		(4,947)		(4,955)
Operating lease asset		(280,845)		(276,420)
Other		(214)		(136)
Total	$	(425,433)	$	(431,249)

Net deferred tax asset/(liability)	$	37,885	$	(30,472)

At December 29, 2020 and December 31, 2019, we had $35.6 million and $14.3 million, respectively, of U.S. federal credit carryforwards which begin to expire in 2038. This increase was driven primarily by our fiscal 2020 net operating loss. At December 29, 2020, we had $79.5 million of state net operating loss carryforwards, resulting primarily from our fiscal 2020 loss, with statutory carryforward periods ranging from 5 years to no expiration period. The earliest year that a material state new operating loss will expire in 2030. At both December 29, 2020 and December 31, 2019, we had $1.9 million of state hiring and investment credits which begin to expire in 2024. At December 29, 2020 and December 31, 2019, we had $2.7 million and $2.9 million, respectively, of foreign net operating loss carryforwards which begin to expire in 2038.

We assess the available evidence to estimate if these carryforwards and our other deferred tax assets will be realized. We concluded that a substantial portion of our deferred tax assets are more likely than not to be realized by reversals of existing taxable temporary differences and that forecasted future taxable income, exclusive of reversing temporary differences, will result in realization of a substantial portion of the remainder. We did not need to consider tax planning strategies in this analysis. Based on this evaluation, at December 29, 2020 and December 31, 2019 we recorded a valuation allowance of $1.0 million and $0.7 million, respectively, to reflect the amount that we will likely not realize. This assessment could change if estimates of future taxable income during the carryforward period are revised. The earliest tax year still subject to examination by a significant taxing jurisdiction is 2010.

At December 29, 2020, we had a reserve of $0.7 million for uncertain tax positions. If recognized, this amount would impact our effective income tax rate. A reconciliation of the beginning and ending amount of our uncertain tax positions is as follows (in thousands):


	Fiscal Year
	2020		2019		2018

Balance at beginning of year	$	704	$	830	$	843
Additions related to current period tax positions		(49)		13		104
Reductions related to settlements with taxing authorities and lapses of statutes of limitations		—		(139)		(117)
Balance at end of year	$	655	$	704	$	830

At December 29, 2020 and December 31, 2019, we had $0.3 million and $0.2 million, respectively of accrued interest and penalties related to uncertain tax positions. None of the balance of uncertain tax positions at December 29, 2020 relates to tax positions for which it is reasonably possible that the total amount could decrease during the next twelve months based on the lapses of statutes of limitations.