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Income Taxes

12 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

Income Taxes

8. 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% percent and represents a blended income tax rate for the current fiscal year. For fiscal 2019, our federal corporate income tax rate will be 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 $8.7 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 earnings for the fiscal year ended September 30, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. While we are able to make a reasonable estimate of the impacts of the Tax Act, adjustments may occur and may be affected by other factors, including, but not limited to, further refinement of our calculations, changes in interpretations and assumptions and regulatory changes from the Internal Revenue Service (IRS), the SEC, the FASB, and various tax jurisdictions. We do not expect any future impact to be material.

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

		Years Ended September 30,
		2018				2017				2016
Current
Federal		$	2,438			$	2,989			$	260
State and local			1,219				1,097				970
Total current income tax expense			3,657				4,086				1,230

Deferred
Federal			(8,096	)			1,545				1,110
State and local			1,321				728				33
Total deferred income tax expense (benefit)			(6,775	)			2,273				1,143

Total income tax expense (benefit)		$	(3,118	)		$	6,359			$	2,373

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

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,
		2018				2017				2016
Computed expected income tax expense		$	4,576			$	4,979			$	4,366
State income taxes, net of federal benefit			804				291				730
Deferred taxes on subsidiaries acquired/sold			709				-				(841	)
Permanent differences			85				108				(109	)
Change in deferred tax liability rate			(8,832	)			1,329				-
Reserve for uncertain tax position			-				406				240
Tax credits			(808	)			(564	)			(2,013	)
Other			348				(190	)			-
Total income tax expense (benefit)		$	(3,118	)		$	6,359			$	2,373

During the fiscal year ended September 30, 2016 the Company deconsolidated three subsidiaries. Two of these subsidiaries were 100 percent owned subsidiaries, 100 percent of the stock of both of these subsidiaries were sold to third parties. The third subsidiary was a 51 percent owned subsidiary that was accounted for under the consolidated method; 31 percent of the 51 percent ownership of the stock was sold during the year to a third party, and the investment is now accounted for under the cost method. In accordance with U.S. GAAP, the company has elected to account for the deferred taxes on the inside basis differences of all three deconsolidated subsidiaries as a component of the gain or loss on the sale of the shares. All outside basis differences in the investment in subsidiaries stock are accounted for as a component of the tax provision.

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,
		2018				2017
Deferred tax assets:
Patron tax		$	948			$	1,954
Capital loss carryforwards			763				-
Other			-				231
			1,711				2,185
Deferred tax liabilities:
Intangibles			(13,110	)			(18,549	)
Property and equipment			(7,206	)			(9,177	)
Other			(947	)			-
			(21,263	)			(27,726	)
Net deferred tax liability		$	(19,552	)		$	(25,541	)

For the year ended September 30, 2016, income tax expense includes a tax benefit in the amount of $2.0 million representing the net amount to be realized from fiscal year 2016 and from amending certain prior year federal tax returns to take the available FICA tip tax credits which were not taken in prior years. The Company will continue to utilize FICA tip credits in future tax filings.

Included in the Company’s deferred tax liabilities at September 30, 2018 and 2017 is approximately $16.3 million and $16.3 million, respectively, representing the tax effect of indefinite-lived intangible assets from club acquisitions 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.

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. During the year ended September 30, 2018 and 2017, the Company has accrued $165,000 and $865,000, respectively, (all related to previous years’ taxes) in uncertain state tax positions. In fiscal 2017, the Company also accrued $223,000 and $266,000 in penalties and interest, respectively, related to uncertain tax positions. In fiscal 2018, the Company released $700,000 of uncertain tax positions due to a settlement with New York state.

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

		Years Ended September 30,
		2018				2017				2016
Balance at beginning of year		$	865			$	240			$	-
Additions for tax positions of prior years			-				625				240
Released in current year			(700	)			-				-

Balance at end of year		$	165			$	865			$	240

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. Fiscal year ended September 30, 2016 remains open to tax examination. The Company’s federal income tax returns for the years ended September 30, 2015, 2014 and 2013 have been examined by the Internal Revenue Service with no changes. These years are now under examination for payroll taxes. The Company is also being examined for state income taxes, the settlement of which may occur within the next twelve months.