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INCOME TAXES | 9 Months Ended
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Sep. 23, 2020
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXESWe 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 (Benefit) A reconciliation of income tax expense (benefit) computed at the U.S. federal statutory income tax rate to the recognized income tax expense (benefit) is as follows:
| Thirteen Weeks Ended |  | Thirty-Nine Weeks Ended
| September 23 2020 |  | September 25 2019 |  | September 23 2020 |  | September 25 2019
Expected U.S. federal income taxes at statutory rate | $ | (1,450) |  | 21.0 | % |  | $ | 1,738 |  | 21.0 | % |  | $ | (6,725) |  | 21.0 | % |  | $ | 5,492 |  | 21.0 | %
State and local income taxes, net of federal benefit | (492) |  | 7.1 | % |  | 505 |  | 6.1 | % |  | (2,192) |  | 6.8 | % |  | 1,746 |  | 6.7 | %
Foreign withholding taxes | 504 |  | (7.3) | % |  | 655 |  | 7.9 | % |  | 712 |  | (2.2) | % |  | 1,624 |  | 6.2 | %
Tax credits | (701) |  | 10.1 | % |  | (2,874) |  | (34.7) | % |  | (1,128) |  | 3.5 | % |  | (4,697) |  | (18.0) | %
Return to provision adjustment | 132 |  | (1.9) | % |  | (153) |  | (1.8) | % |  | 132 |  | (0.4) | % |  | (153) |  | (0.6) | %
Non-controlling interest | (11) |  | 0.2 | % |  | (346) |  | (4.2) | % |  | 411 |  | (1.3) | % |  | (1,291) |  | (4.9) | %
Tax effect of change in basis related to the adoption of ASC 842 | — |  | — | % |  | — |  | — | % |  | — |  | — | % |  | 1,161 |  | 4.4 | %
Change in valuation allowance | 1,221 |  | (17.7) | % |  | (2,587) |  | (31.2) | % |  | 1,971 |  | (6.2) | % |  | (3,847) |  | (14.7) | %
Other | — |  | — | % |  | (82) |  | (1.0) | % |  | 17 |  | — | % |  | (82) |  | (0.3) | %
Income tax benefit | $ | (797) |  | 11.5 | % |  | $ | (3,144) |  | (38.0) | % |  | $ | (6,802) |  | 21.2 | % |  | $ | (47) |  | (0.2) | %
Our effective income tax rates for the thirteen weeks ended September 23, 2020 and September 25, 2019 were 11.5% and (38.0)%, respectively. The increase was primarily driven by lower pre-tax book income resulting in a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognition of a valuation allowance against foreign tax credits that are not expected to be realized before the expiration of the carryforward period. Additionally, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings. Our weighted-average ownership interest in SSE Holdings was 92.5% and 85.6% for the thirteen weeks ended September 23, 2020 and September 25, 2019, respectively. Our effective income tax rates for the thirty-nine weeks ended September 23, 2020 and September 25, 2019 were 21.2% and (0.2)%, respectively. The increase was primarily driven by lower pre-tax book income resulting in a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognition of a valuation allowance against foreign tax credits that are not expected to be realized before the expiration of the carryforward period. These were partially offset by a reduction in the tax effect of changes related to the adoption of new accounting standards, for which there were none during the thirty-nine weeks ended September 23, 2020. Additionally, as noted above, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings. Our weighted-average ownership interest in SSE Holdings was 92.1% and 82.1% for the thirty-nine weeks ended September 23, 2020 and September 25, 2019, respectively. Deferred Tax Assets and Liabilities During the thirty-nine weeks ended September 23, 2020, we acquired an aggregate of 213,263 LLC Interests in connection with the redemption of LLC Interests, activity relating to our stock compensation plan, and in connection with the second quarter equity offering. We recognized a deferred tax asset in the amount of $1,562 associated with the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests. As of September 23, 2020, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $175,320. 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. During the thirty-nine weeks ended September 23, 2020, we also recognized $116 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," herein 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 23, 2020, 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 related to New York City UBT and certain foreign tax credits) are more likely than not to be realized. As such, an additional valuation allowance of $1,221 was recognized on certain foreign tax credits not expected to be realized before the expiration of the carryforward period. Uncertain Tax Positions No uncertain tax positions existed as of September 23, 2020. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to our initial public offering in February of 2015 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 2015 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 23, 2020, we acquired an aggregate of 33,195 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 $414 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 23, 2020 and September 25, 2019, payments of $6,643 and $707, inclusive of interest, were made to the parties to the Tax Receivable Agreement, respectively. As of September 23, 2020, the total amount of TRA Payments due under the Tax Receivable Agreement, was $228,197, of which no amount was included in other current liabilities on the Condensed Consolidated Balance Sheet. See Note 15, Commitments and Contingencies, for more information relating to our liabilities under the Tax Receivable Agreement. CARES Act On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a retroactive technical correction of prior tax legislation for tax depreciation of certain qualified improvement property, among other changes. We are currently estimating the amount of accelerated tax depreciation deductions as a result of the technical amendments made by the CARES Act to qualified improvement property. During the thirty-nine weeks ended September 23, 2020, we recognized accelerated tax depreciation deductions of $446 related to assets placed in service in fiscal 2020, and are recorded as components within our deferred income taxes, net on the Condensed Consolidated Balance Sheets. In addition, subsequent to the second quarter of 2020, we began deferring the employer-paid portion of social security taxes as permitted by the CARES Act.

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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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