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INCOME TAXES | 9 Months Ended
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Sep. 27, 2017
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES
We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions. Income Tax Expense A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense is as follows:
| Thirteen Weeks Ended |  |  | Thirty-Nine Weeks Ended |
| September 27 2017 |  |  | September 28 2016 |  |  | September 27 2017 |  |  | September 28 2016 |
Expected U.S. federal income taxes at statutory rate | $ | 3,627 |  | 35.0 | % |  | $ | 3,139 |  | 34.0 | % |  | $ | 9,609 |  | 35.0 | % |  | $ | 7,734 |  | 34.0 | %
State and local income taxes, net of federal benefit | 630 |  | 6.1 | % |  | 533 |  | 5.8 | % |  | 1,638 |  | 6.0 | % |  | 1,277 |  | 5.6 | %
Foreign withholding taxes | 292 |  | 2.8 | % |  | 148 |  | 1.6 | % |  | 705 |  | 2.6 | % |  | 505 |  | 2.2 | %
Tax credits | (399 | ) | (3.8 | )% |  | (243 | ) | (2.6 | )% |  | (777 | ) | (2.8 | )% |  | (369 | ) | (1.6 | )%
Non-controlling interest | (1,132 | ) | (10.9 | )% |  | (1,134 | ) | (12.3 | )% |  | (3,114 | ) | (11.3 | )% |  | (3,089 | ) | (13.6 | )%
Other | (524 | ) | (5.1 | )% |  | — |  | — | % |  | (524 | ) | (2.0 | )% |  | — |  | — | %
Income tax expense | $ | 2,494 |  | 24.1 | % |  | $ | 2,443 |  | 26.5 | % |  | $ | 7,537 |  | 27.5 | % |  | $ | 6,058 |  | 26.6 | %
Our effective income tax rates for the thirteen weeks ended September 27, 2017 and September 28, 2016 were 24.1% and 26.5%, respectively. The decrease was driven by a benefit related to an adjustment recognized in connection with the filing of our prior year tax returns and higher tax credits, which were partially offset by the increase in our ownership interest in SSE Holdings, which increases our share of the taxable income of SSE Holdings, and higher foreign withholding taxes. Our weighted-average ownership interest in SSE Holdings was 70.9% and 66.1% for the thirteen weeks ended September 27, 2017 and September 28, 2016, respectively. Our effective income tax rates for the thirty-nine weeks ended September 27, 2017 and September 28, 2016 were 27.5% and 26.6%, respectively. The increase in our effective income tax rate for the period is primarily due to an increase in our ownership interest in SSE Holdings. As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings also increases. Our weighted-average ownership interest in SSE Holdings was 70.3% and 61.5% for the thirty-nine weeks ended September 27, 2017 and September 28, 2016, respectively. This increase in ownership interest was partially offset by a benefit related to an adjustment recognized in connection with the filing of our prior year tax returns and higher tax credits. Deferred Tax Assets and Liabilities During the thirty-nine weeks ended September 27, 2017, we acquired an aggregate of 1,009,727 LLC Interests in connection with the redemption of LLC Interests and activity relating to our stock compensation plan. We recognized a deferred tax asset in the amount of $9,883 associated with the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests. As of September 27, 2017, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $216,285. However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. As of September 27, 2017, the total valuation allowance established against the deferred tax asset to which this portion relates was $15,679. During the thirty-nine weeks ended September 27, 2017, we also recognized $5,216 of deferred tax assets related to additional tax basis increases generated from expected future payments under the Tax Receivable Agreement and related deductions for imputed interest on such payments. See "—Tax Receivable Agreement" for more information. We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of September 27, 2017, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets described above relating to basis differences that are expected to result in a capital loss upon the eventual sale of our interest in SSE Holdings) are more likely than not to be realized. As such, no additional valuation allowance was recognized. Uncertain Tax Positions No uncertain tax positions existed as of September 27, 2017. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and related organizational transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2013 for SSE Holdings. Tax Receivable Agreement Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. We plan to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. On February 4, 2015, we entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. The rights of each member of SSE Holdings, that is a party to the Tax Receivable Agreement, are assignable to transferees of their respective LLC Interests. During the thirty-nine weeks ended September 27, 2017, we acquired an aggregate of 685,800 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of our investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized an additional liability in the amount of $12,918 for the TRA Payments due to the redeeming members, representing 85% of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. During the thirty-nine weeks ended September 27, 2017, payments of $1,471, inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. No amounts were paid to the members during the thirty-nine weeks ended September 28, 2016. As of September 27, 2017, the total amount of TRA Payments due under the Tax Receivable Agreement, was $283,961, of which $3,140 was included in other current liabilities on the Condensed Consolidated Balance Sheet. See Note 13 for more information relating to our liabilities under the Tax Receivable Agreement.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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