Income Taxes

12 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

11. Income Taxes

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Our federal corporate income tax rate for fiscal 2018 was 24.5% and represents a blended income tax rate for that fiscal year. For fiscal 2020 and 2019, our federal corporate income tax rate was 21%.

Additionally, for the fiscal year ended September 30, 2018, in accordance with FASB ASC Topic 740, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $8.8 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of September 30, 2018 and a corresponding income tax benefit reflected in our consolidated statements of operations for the fiscal year ended September 30, 2018. We recorded no remeasurement adjustment related to SEC Staff Accounting Bulletin No. 118.

Income tax expense (benefit) consisted of the following (in thousands):

	Years Ended September 30,
	2020			2019			2018
				(As Revised)
Current
Federal	$	215		$	1,886		$	2,438
State and local		560			1,037			1,219
Total current income tax expense (benefit)		775			2,923			3,657
Deferred
Federal		(1,248	)		913			(8,096	)
State and local		(20	)		(92	)		1,321
Total deferred income tax expense (benefit)		(1,268	)		821			(6,775	)
Total income tax expense (benefit)	$	(493	)	$	3,744		$	(3,118	)

The Company and its subsidiaries do not operate in tax jurisdictions outside of the United States.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

11. Income Taxes - continued

Income tax expense (benefit) differs from the “expected” income tax expense computed by applying the U.S. federal statutory rate to earnings before income taxes for the years ended September 30 as a result of the following (in thousands):

	Years Ended September 30,
	2020			2019			2018
Computed expected income tax expense (benefit)	$	(1,429	)	$	5,080		$	4,371
State income taxes, net of federal benefit		253			672			804
Deferred taxes on subsidiaries acquired/sold		-			-			709
Permanent differences		395			45			85
Change in deferred tax liability rate		-			-			(8,832	)
Change in valuation allowance		1,273			-			-
Tax credits		(945	)		(900	)		(808	)
Other		(40	)		(1,153	)		553
Total income tax expense (benefit)	$	(493	)	$	3,744		$	(3,118	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):

	September 30,
	2020			2019
Deferred tax assets:
Patron tax	$	349		$	621
Capital loss carryforwards		1,263			420
Other		2,046			-
Valuation allowance		(1,273	)		-
		2,385			1,041
Deferred tax liabilities:
Intangibles		(14,106	)		(14,491	)
Property and equipment		(8,669	)		(8,024	)
Other		-			(184	)
		(22,775	)		(22,699	)
	$	(20,390	)	$	(21,658	)

Included in the Company’s deferred tax liabilities at September 30, 2020 and 2019 is the tax effect of indefinite-lived intangible assets from club acquisitions amounting to approximately $14.9 million and $19.3 million, respectively, which are not deductible for tax purposes. These deferred tax liabilities will remain in the Company’s consolidated balance sheet until the related clubs are sold or impaired.

The Company may recognize the tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. We recognize accrued interest related to unrecognized tax benefits as a component of accrued liabilities. We recognize penalties related to unrecognized tax benefits as a component of selling, general and administrative expenses, and recognize interest accrued related to unrecognized tax benefits in interest expense. In fiscal 2018, the Company released $700,000 of uncertain tax positions due to a settlement with New York state. In fiscal 2019, the Company released the remaining amount accrued when the examination was closed.

RCI HOSPITALITY HOLDINGS, INC.

Notes to Consolidated Financial Statements

11. Income Taxes - continued

The following table shows the changes in the Company’s uncertain tax positions (in thousands):

	Years Ended September 30,
	2020		2019			2018
Balance at beginning of year	$	-	$	165		$	865
Additions for tax positions of prior years		-		-			-
Decrease related to settlements with taxing authorities		-		-			(700	)
Reduction due to lapse from closed examination		-		(165	)		-
Balance at end of year	$	-	$	-		$	165

The full balance of uncertain tax positions, if recognized, would affect the Company’s annual effective tax rate, net of any federal tax benefits. The Company does not expect any changes that will significantly impact its uncertain tax positions within the next twelve months.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states. The Company’s federal income tax returns for the years ended September 30, 2013 through 2017 have been examined by the Internal Revenue Service with only immaterial changes. Fiscal year ended September 30, 2018 and subsequent years remain open to federal tax examination. The Company is also being examined for state income taxes, the outcome of which may occur within the next twelve months.

On March 27, 2020, President Trump signed the CARES Act into law. As a result of this, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration. The CARES Act includes, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently evaluating the impact of the provisions of the CARES Act. The CARES Act also established a Paycheck Protection Program, whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company has submitted its application for a PPP loan and on May 8, 2020 has received approval and funding for its restaurants, shared service entity and lounge. Ten of our restaurant subsidiaries received amounts ranging from $271,000 to $579,000 for an aggregate amount of $4.2 million; our shared-services subsidiary received $1.1 million; and one of our lounges received $124,000. None of our adult nightclub and other non-core business subsidiaries received funding under the PPP. The Company believes it has used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company has currently utilized all of the PPP funds and has submitted its forgiveness applications. As of the filing of this report, we have received ten Notices of PPP Forgiveness Payment from the Small Business Administration out of the twelve of our PPP loans granted. All of the notices received forgave 100% of each of the ten PPP loans totaling the amount of $4.9 million. No assurance can be provided that the Company will in fact obtain forgiveness of the remaining two PPP loans in whole or in part. See Note 3.