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INCOME TAXES | 12 Months Ended
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Dec. 26, 2018
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 The components of income before income taxes are follows:
| 2018 |  |  | 2017 |  |  | 2016 |
Domestic | $ | 21,595 |  |  | $ | 152,204 |  |  | $ | 20,623 |
Foreign | 9,215 |  |  | 8,089 |  |  | 7,873 |
Income before income taxes | $ | 30,810 |  |  | $ | 160,293 |  |  | $ | 28,496 |
The components of income tax expense are as follows:
|  |  | 2018 |  |  | 2017 |  |  | 2016 |
Current income taxes: |  |  |  |  |
| Federal | $ | 5,281 |  |  | $ | 518 |  |  | $ | 3,767 |
| State and local | 858 |  |  | 3,615 |  |  | 2,439 |
| Foreign | 1,935 |  |  | 942 |  |  | 667 |
| Total current income taxes | 8,074 |  |  | 5,075 |  |  | 6,873 |
Deferred income taxes: |  |  |  |  |
| Federal | (210 | ) |  | 145,139 |  |  | (48 | )
| State and local | 998 |  |  | 1,195 |  |  | (475 | )
| Total deferred income taxes | 788 |  |  | 146,334 |  |  | (523 | )
Income tax expense | $ | 8,862 |  |  | $ | 151,409 |  |  | $ | 6,350 |
Reconciliations of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense and the U.S. statutory income tax rate to our effective tax rates are as follows:
|  | 2018 |  |  | 2017 |  |  | 2016 |
Expected U.S. federal income taxes at statutory rate | $ | 6,470 |  | 21.0 | % |  | $ | 56,103 |  | 35.0 | % |  | $ | 9,689 |  | 34.0 | %
State and local income taxes, net of federal benefit | 797 |  | 2.6 | % |  | 2,590 |  | 1.6 | % |  | 1,461 |  | 5.1 | %
Foreign withholding taxes | 1,935 |  | 6.3 | % |  | 942 |  | 0.6 | % |  | 667 |  | 2.3 | %
Tax credits | (2,151 | ) | (7.0 | )% |  | (1,230 | ) | (0.8 | )% |  | (779 | ) | (2.7 | )%
Non-controlling interest | (1,908 | ) | (6.2 | )% |  | (3,273 | ) | (2.0 | )% |  | (3,765 | ) | (13.2 | )%
Remeasurement of deferred tax assets in connection with the enactment of the TCJA | — |  | — | % |  | 138,636 |  | 86.5 | % |  | — |  | — | %
Remeasurement of deferred tax assets in connection with other tax rate changes | 3,794 |  | 12.3 | % |  | 1,657 |  | 1.0 | % |  | (1,353 | ) | (4.7 | )%
Remeasurement of liabilities under tax receivable agreement in connection with the enactment of the TCJA | — |  | — | % |  | (44,051 | ) | (27.4 | )% |  | — |  | — | %
Other | (75 | ) | (0.2 | )% |  | 35 |  | — | % |  | 430 |  | 1.5 | %
Income tax expense | $ | 8,862 |  | 28.8 | % |  | $ | 151,409 |  | 94.5 | % |  | $ | 6,350 |  | 22.3 | %
Our effective income tax rates for fiscal 2018, 2017 and 2016 were 28.8%, 94.5% and 22.3%, respectively. The decrease in our effective income tax rate from fiscal 2017 to fiscal 2018 and the increase from fiscal 2016 to fiscal 2017 were primarily due to the remeasurement of deferred tax assets resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA") in fiscal 2017. In December 2017, the TCJA was enacted into law and provided for significant changes to the U.S. Internal Revenue Code of 1986, as amended, including the reduction of the U.S. federal corporate income tax rate from 35% to 21%, among other provisions. We calculated our best estimate of the impact of the TCJA based on current interpretations and understanding of the TCJA and recognized an additional $138,636 of income tax expense in fiscal 2017, in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), relating to the remeasurement of our deferred tax assets. During fiscal 2018 the Company finalized its calculations related to the impacts of the TCJA with no adjustment to the Company’s previously recorded provisional tax expense. Deferred Tax Assets and Liabilities The components of deferred tax assets and liabilities are as follows:
|  |  | December 26 2018 |  |  | December 27 2017 |
Deferred tax assets: |  |  |
| Investment in partnership | $ | 168,451 |  |  | $ | 137,449 |
| Tax Receivable Agreement | 57,203 |  |  | 43,464 |
| Deferred rent | 1,109 |  |  | 571 |
| Deferred revenue | 184 |  |  | 59 |
| Stock-based compensation | 375 |  |  | 322 |
| Net operating loss carryforwards | 18,046 |  |  | 12,332 |
| Tax credits | 5,194 |  |  | 2,328 |
| Other assets | 331 |  |  | 176 |
| Total gross deferred tax assets | 250,893 |  |  | 196,701 |
Valuation allowance | (6,925 | ) |  | (10,114 | )
Total deferred tax assets, net of valuation allowance | 243,968 |  |  | 186,587 |
Deferred tax liabilities: |  |  |
| Property and equipment | (1,435 | ) |  | (673 | )
| Total gross deferred tax liabilities | (1,435 | ) |  | (673 | )
Net deferred tax assets | $ | 242,533 |  |  | $ | 185,914 |
As of December 26, 2018, our federal and state net operating loss carryforwards for income tax purposes were $68,658 and $60,546. If not utilized, $16,791 of our federal net operating losses can be carried forward indefinitely, and the remainder will begin to expire in 2035. If not utilized $4,586 of our state net operating loss carryforwards can be carried forward indefinitely, and the remainder will begin to expire in 2027. As described in Note 12, we acquired an aggregate of 2,993,356 LLC Interests during fiscal 2018 through redemptions of LLC Interests and activity under stock-based compensation plans. We recognized a deferred tax asset in the amount of $38,843 associated with the basis difference in our investment in SSE Holdings upon acquiring these LLC Interests. As of December 26, 2018, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $168,451. These were partially offset by reductions in basis due to the utilization of $12,383 of amortization. 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 December 26, 2018, we established a valuation allowance in the amount of $6,192 against the deferred tax asset to which this portion relates. During fiscal 2018, we also recognized $12,495 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 December 26, 2018, 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, except for certain credits we no longer expect to utilize before expiration. As such, a valuation allowance in the amount of $733 was recognized. The net change in valuation allowance for fiscal 2018 was a decrease of $3,189. Uncertain Tax Positions There were no reserves for uncertain tax positions as of December 26, 2018 and December 27, 2017. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and 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 2014 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 non-controlling interest holders and other qualifying transactions. We plan to make an election under Section 754 of 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 by the non-controlling interest holders 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 the then-existing non-controlling interest holders (the "Tax Receivable Agreement") that provides for the payment by us to the non-controlling interest holders 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 non-controlling interest holder under the Tax Receivable Agreement are assignable to transferees of its LLC Interests. During fiscal 2018, we acquired an aggregate of 2,692,660 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 $44,338 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. No payments were made to members of SSE Holdings pursuant to the Tax Receivable Agreement during fiscal 2018. As of December 26, 2018, the total amount of TRA Payments due under the Tax Receivable Agreement was $203,725, of which $5,804 was included in other current liabilities on the Consolidated Balance Sheet. See Note 18 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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