Income Taxes

12 Months Ended

Jan. 03, 2023

Income Taxes

Income Taxes

18.  Income Taxes

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

	Fiscal Year
	2022		2021		2020
Income/(Loss) before income taxes	$	32,892	$	71,620	$	(356,036)
Income tax provision/(benefit):
Current:
Federal	$	3,520	$	15,746	$	(38,414)
State		4,895		4,350		2,971
Total current		8,415		20,096		(35,443)
Deferred:
Federal		(17,733)		(20,434)		(52,607)
State		(913)		(415)		(14,621)
Total deferred		(18,646)		(20,849)		(67,228)
Total benefit	$	(10,231)	$	(753)	$	(102,671)

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

	Fiscal Year
	2022		2021		2020
U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State and district income taxes, net of federal benefit	8.9		4.2		2.6
Credit for FICA taxes paid on tips	(66.4)		(24.2)		2.1
Other credits and incentives	(10.7)		(4.2)		0.3
Impact of net operating loss carryback	0.0		(6.3)		3.4
Deferred compensation	9.7		(2.9)		0.6
Equity compensation	5.5		0.0		(0.4)
Uncertain tax positions	(2.3)		10.3		0.0
Non-deductible executive compensation	2.8		0.3		(0.1)
Other	0.4		0.7		(0.7)
Effective tax rate	(31.1)	%	(1.1)	%	28.8	%

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”). During fiscal 2021, we filed a refund claim in the amount of $18.4 million for our fiscal 2020 net operating loss carryback, which was received during fiscal 2022. In January 2022, we filed amended returns for tax years 2018 and 2019 requesting total refunds of $21.3 million for credits released by our fiscal 2020 loss carryback. These refunds have not yet been received. The effects of these claims were primarily included in our fiscal 2020 provision for income taxes, using estimates based on the best information available at the time we prepared our fiscal 2020 consolidated financial statements, and were adjusted to as-filed actual amounts in our fiscal 2021 provision for income taxes. These adjustments had a minor effect on our fiscal 2021 provision for income taxes. In our fiscal 2021 provision for income taxes, we also recorded the effects of accelerating the remittance of certain FICA taxes that had been deferred pursuant to the CARES Act. The accelerated remittance increased the value of our fiscal 2020 loss carryback by $4.3 million. We made no further adjustments in our fiscal 2022 provision for income taxes relating to these amounts.

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

	January 3, 2023		December 28, 2021
Deferred tax assets:
Staff member benefits	$	31,325	$	36,295
Insurance reserves		14,374		12,897
Operating lease liability		323,094		315,403
Deferred income		35,928		33,075
Tax credit carryforwards		57,710		34,871
Goodwill		21,331		19,103
Stock-based compensation		10,769		10,122
State and foreign net operating loss carryforwards		2,435		3,005
Other		604		1,063
Subtotal		497,570		465,834
Less: Valuation allowance		(1,223)		(1,036)
Total	$	496,347	$	464,798
Deferred tax liabilities:
Property and equipment	$	(113,565)	$	(109,019)
Prepaid expenses		(8,151)		(7,312)
Inventory		(8,399)		(7,802)
Accrued rent		(5,285)		(5,087)
Operating lease asset		(283,921)		(277,220)
Other		(781)		(724)
Total	$	(420,102)	$	(407,164)
Net deferred tax asset	$	76,245	$	57,634

At January 3, 2023 and December 28, 2021, we had $56.5 million and $33.6 million, respectively of U.S. federal credit carryforwards which begin to expire in 2038 and $1.6 million and $1.7 million, respectively, of state hiring and investment credits which begin to expire in 2024. At January 3, 2023 and December 28, 2021, we had $2.5 million and $2.7 million, respectively of foreign net operating loss carryforwards which begin to expire in 2038 and $46.6 million and $64.6 million, respectively, of state net operating loss carryforwards with statutory carryforward periods ranging from 5 years to no expiration period. The earliest year that a material state net operating loss will expire is 2032.

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 January 3, 2023 and December 28, 2021 we carried a valuation allowance of $1.2 million and $1.0 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 2015.

At January 3, 2023, we had a reserve of $3.8 million for uncertain tax positions, all of which would favorably impact our effective income tax rate if resolved in our favor. A reconciliation of the beginning and ending amount of our uncertain tax positions is as follows (in thousands):

	Fiscal Year
	2022		2021		2020
Balance at beginning of year	$	4,799	$	655	$	704
Additions related to prior year tax positions		227		4,157		—
Additions related to current period tax positions		(54)		(13)		(49)
Reductions related to settlements with taxing authorities		(1,185)		—		—
Balance at end of year	$	3,787	$	4,799	$	655

At January 3, 2023 and December 28, 2021, we had $2.2 million and $3.6 million, respectively of accrued interest and penalties related to uncertain tax positions. None of the balance of uncertain tax positions at January 3, 2023 related 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.