INCOME TAXES

12 Months Ended

Jan. 03, 2021

(12) INCOME TAXES

For financial reporting purposes, income (loss) before income taxes consists of the following components for the periods presented:


	Year Ended
(in thousands)	January 3, 2021		December 29, 2019
United States	$	1,124	$	(2,127)
Foreign		306		221
Total	$	1,430	$	(1,906)

The following table summarizes the income tax (expense) benefit for the periods presented:


	Year Ended
(in thousands)	January 3, 2021		December 29, 2019
Current:
Federal	$	6	$	(10)
State		(169)		(48)
Foreign		(9)		(25)
		(172)		(83)

Deferred:
Federal		2,801		603
State		208		139
		3,009		742
Total income tax (expense) benefit	$	2,837	$	659

The impact of uncertain tax positions taken or expected to be taken on income tax returns must be recognized in the financial statements at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

The following is a reconciliation of the beginning and ending amounts of gross unrecognized tax benefit for the periods presented:


(in thousands)
Balance at December 30, 2018		8
Decreases due to lapses of statutes of limitations		(4)
Balance at December 29, 2019		4
Decreases due to lapses of statutes of limitations		(2)
Balance at January 3, 2021	$	2

Substantially all of the Company’s unrecognized tax benefits, if recognized, would impact its effective tax rate.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The preparation of these income tax returns requires it to interpret and apply relevant federal and state income tax laws. It is common for federal and state taxing authorities to periodically examine filed tax returns. During these examinations, it is possible for taxing authorities to interpret facts or tax law differently than the Company does. As a result, the Company may be required to adjust tax liabilities affecting its effective tax rate. Tax years 2017 and forward remain subject to federal examination. Tax years 2016 and forward remain subject to state examination. It is possible that the liability associated with the unrecognized tax benefits will increase or decrease within the next 12 months. The expiration of statutes of limitations would decrease the Company’s unrecognized tax benefits by approximately $2,000.

The Company has significant net deferred tax assets (“DTA”), which results from the net temporary timing differences between amounts recorded within its consolidated financial statements in accordance with GAAP and such amounts measured in accordance with the laws of various taxing jurisdictions and as reported in the Company’s tax

returns. A DTA generally represents future tax benefits to be received when temporary differences previously reported in the Company’s consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on other Company’s tax returns. As of January 3, 2021, the majority of our DTA resulted from net operating loss and tax credit carryforwards, which will not be realized unless the Company generates taxable income in the future. The Company evaluates its net deferred tax asset on a quarterly basis to determine whether current facts and circumstances indicate that the DTA may not be fully realizable and it provides for valuation allowances on those portions of the DTA that it does not expect to realize.

Significant judgment is required in determining the realizability of our DTA. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, the Company’s experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, the Company first considered its history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which it operates, its financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. Finally, the Company considered both its near and long-term financial outlook. After considering all available evidence both positive and negative, the Company concluded that recognition of valuation allowances for substantially all of its DTA was not required. The Company recognized a valuation allowance relating to certain state net operating losses for which it believes that is it more likely than not that the benefit will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $1.4 million on the deferred tax asset related to these state net operating loss carryforwards.

The following is a summary of the components of our net deferred tax assets as of the periods presented:


(in thousands)	January 3, 2021		December 29, 2019
Deferred tax asset:
Federal net operating loss carry-forwards		2,298		1,980
State net operating loss carry-forwards		1,860		1,993
Intangible property basis difference		—		(7)
Tax credit carryover		3,225		2,581
Accrued expenses		241		168
Stock-based compensation		313		187
Deferred revenue		915		693
Lease reserve		18,356		8,060
Accrued and deferred compensation		59		53
Contribution carryover		49		50
Transaction and organization costs		98		121
Inventories		19		10
Total deferred tax asset	$	27,433	$	15,889

Deferred tax liability:
Property and equipment basis difference	$	(2,083)	$	(755)
Intangible property basis difference		(2,112)		—
Inventories		(178)		(146)
Prepaid expenses		(306)		(365)
Right of use asset		(16,420)		(6,664)
Total deferred tax liability	$	(21,099)	$	(7,930)

Net deferred tax assets		6,334		7,959
Valuation allowance		(1,400)		(1,313)
Deferred tax asset, net	$	4,934	$	6,646

During the year ended January 3, 2021, the net change in the Company’s DTA valuation allowance was approximately $87,000.

As of January 3, 2021, the Company had cumulative state net operating loss carry-forwards for tax reporting purposes of approximately $26.8 million and federal net operating loss carry-forwards for tax reporting purposes of $10.9 million which, if not used, will begin to expire in fiscal 2021 and 2038, respectively.

The following is a reconciliation from our statutory tax rate to our effective tax rate for the periods presented:


	Year Ended
	January 3, 2021		December 29, 2019
Federal statutory tax rate	21.0	%	21.0	%
State taxes, net of valuation allowance and federal benefit	(9.9)		(4.7)
Deferred rate change	2.0		11.9
Foreign taxes	0.4		(2.0)
Tax effect of permanent differences	(0.4)		0.5
Tax effect of general business credits	(19.4)		24.3
Tax effect of foreign tax credit	(0.4)		2.0
Uncertain tax positions	(0.2)		0.3
Return to povision update	0.9		(173.8)
Change in valuation allowance	4.0		171.8
Tax effect of permanent differences - Bargain Purchase Gain	(129.7)		—
Other	(1.0)		0.9
Effective tax rate	(132.7)	%	52.2	%

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted on March 27, 2020 and the Consolidated Appropriations Act (the Relief Act) was enacted on December 27, 2020 in the United States. The key provisions of the CARES Act and the Relief Act, as applicable to the Company, include the following:

•The ability to use net operating losses (NOLs) to offset income without the 80% taxable income limitation enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017, and to carry back NOLs to offset prior year income for five years. These are temporary provisions that apply to NOLs incurred in 2018, 2019 or 2020 tax years. We did not recognize any tax benefit for the year ended December 31, 2020 related to our ability to carry back prior year losses, as well as projected current year losses, under the CARES Act to years with the previous 35% tax rate.

•The ability to claim a current deduction for interest expense up to 50% of Adjusted Taxable Income (ATI) for tax years 2019 and 2020. This limitation was previously 30% of ATI pursuant to the TCJA, and will revert to 30% after 2020. The Company has no current interest expense limitation.

•The ability to defer the payment of the employer portion of social security taxes incurred between March 27, 2020 and December 31, 2020, with 50% of the deferred amount to be paid by December 31, 2021 and the remaining 50% to be paid by December 31, 2022. For the year ended December 31, 2020, the Company did not defer any social security taxes to be paid in 2021 and 2022.

•The ability to claim an Employee Retention Credit (ERC), which is a refundable payroll tax credit, for 50% of qualified wages or benefits, subject to certain limitations, that are paid to an employee when they are not providing services due to Novel Coronavirus (COVID-19). The ERC applies to qualified wages paid or incurred during the period March 13, 2020 through December 31, 2020 and is available to eligible employers whose operations were fully or partially suspended due to COVID-19, or whose gross receipts declined by more than 50% when compared to the applicable period in the prior year. The Relief Act extended this credit to wages paid through July 1, 2021, increased the credit amounts, and now applies to businesses whose sales declined by more than 20%. The Company does not believe that the ERC will provide benefits for the Company.

•The Company received $13.9M in Paycheck Protection Program (PPP) loans and has applied for loan forgiveness in early 2021. The CARES Act provides that the loan forgiveness is tax-exempt for federal purposes. In addition, the Relief Act provided that the expenses paid with the PPP loan proceeds are deductible for federal income tax

purposes. Based on state guidance, certain states have disallowed PPP loan related expenses. As such, the Company has reflected these state addbacks in the calculations.

- 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 + Details