Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes . Income Taxes
The components of the provision for income taxes are as follows (in thousands):
 Fiscal Year Ended December 31,
2020		 Fiscal Year Ended December 26,
2019		 Fiscal Year Ended December 27,
2018
Current (benefit) / expense:
Federal
 $ (1,781) $ 7,975  $ 5,496 
State
 4,391  2,358  1,669 
Total current expense 2,610  10,333  7,165 
Deferred expense / (benefit):
Federal
 11,684  (6,522) 922 
State
 (2,070) (4,062) (1,890)
Total deferred expense / (benefit) 9,614  (10,584) (968)
Provision (benefit) for income taxes $ 12,224  $ (251) $ 6,197 
The following is a summary of the differences between the total provision for income taxes as shown on the financial statements and the provision for income taxes that would result from applying the federal statutory tax rate of 21% for the fiscal years ended December 31, 2020, December 26, 2019, and December 27, 2018 to income before income taxes (in thousands).
Fiscal Year Ended December 31,
2020		 Fiscal Year Ended December 26,
2019		 Fiscal Year Ended December 27,
2018
Computed “expected” provision at statutory rate $ 43,513  $ 31,580  $ 25,700 
State income taxes, net of federal income tax benefit 1,493  (1,364) (627)
Permanent differences:
Excess tax benefit related to options exercised (27,003) (29,441) (17,478)
Other 517  543  457 
Total permanent differences (26,486) (28,898) (17,021)
Change in U.S. tax rate —  — (573)
Provision to return (150) (282) (739)
Federal tax credits (920) (1,306) (685)
CARES Act benefit (7,676) —  — 
Uncertain Tax Positions 2,724  —  — 
Other, net (274) 19  142 
Provision (benefit) for income taxes $ 12,224  $ (251) $ 6,197 
The permanent differences of $27.0 million, $29.4 million, and $17.5 million in fiscal 2020, fiscal 2019, and fiscal 2018, respectively, are the federal benefits due to the recognition of excess tax deductions for stock options exercised. In the table above, the 2020, 2019, and 2018 state benefits related to the recognition of excess tax benefits of $5.3 million, $5.6 million, and $3.3 million, respectively, are included in state income taxes, net of federal income tax benefit.
The Tax Cuts and Jobs Act (the “Act “), which was enacted on December 22, 2017, reduced the U.S. federal corporate income tax rate from 35% to 21% and created new taxes that may apply on certain foreign sourced earnings. Staff Accounting Bulletin No. 118 ("SAB 118") allows for a measurement period that should not extend beyond one year from the Act enactment date of December 22, 2017. In accordance with SAB 118, the Company completed its accounting for the impact of the 2017 Act during the fourth quarter of fiscal 2018, before the end of the measurement period, and recorded a tax benefit of $18.5 million as a result of the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. As of December 31, 2020, the measurement period is closed and any amounts that were provisional at December 26, 2019 were finalized with little to no impact to the consolidated financial statement.
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and (liabilities) are presented below (in thousands):
Fiscal Year Ended December 31,
2020		 Fiscal Year Ended December 26,
2019
Deferred tax assets:
Accruals not currently deductible for tax purposes $ 8,293  $ 2,820 
Inventories 6,941  5,283 
Stock-based compensation 5,979  3,984 
Other intangibles 268  313 
Gift card liability 557  453 
Litigation accrual 120  139 
Lease liabilities 259,273  233,106 
Other 10,732  3,718 
Total deferred tax assets 292,163  249,816 
Deferred tax liabilities:
Intangible assets (27,053) (26,939)
Fixed assets (62,374) (35,576)
Right-of-use assets (227,166) (203,028)
Other (3,560) (2,651)
Total deferred tax liabilities (320,153) (268,194)
Net deferred tax liabilities $ (27,990) $ (18,378)
The Company generated $0.1 million and $0.7 million of tax-effected state net operating losses in fiscal 2020 and fiscal 2019, respectively; as of December 31, 2020, approximately $3.0 million of tax-effected state net operating losses were available to reduce future income taxes. The state net operating losses expire in various amounts beginning in 2032.
In assessing the realization of deferred tax assets, including net operating losses, management considered whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxable income in prior carryback periods, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards in making this assessment, and accordingly, has concluded that no valuation allowance is necessary as of December 31, 2020 or December 26, 2019.
The Company files income tax returns with the U.S. Federal government and various state jurisdictions. Prior tax years beginning in year 2018 remain open to examination by the Internal Revenue Service (“IRS”). We closed a federal audit by the IRS for the 2015 to 2017 tax years.
Following is a reconciliation of the beginning and ending balance of unrecognized tax benefits for periods presented:
Fiscal Year Ended December 31,
2020		 Fiscal Year Ended December 26,
2019		 Fiscal Year Ended December 27,
2018
Unrecognized tax benefits balance at beginning of fiscal year $ 402  $ —  $ — 
Additions based on tax positions related to the current year 281  282  — 
Additions for tax positions of prior years 5,424  120  — 
Unrecognized tax benefits balance at end of fiscal year $ 6,107  $ 402  $ — 
There were $1.9 million of unrecognized tax benefits as of December 31, 2020 that, if recognized, would affect the Company's effective tax rate, while there were no such unrecognized tax benefits as of December 26, 2019 and December 27, 2018 that would affect the Company's effective tax rate in future periods. Over the next twelve months, it is reasonably possible that our unrecognized tax benefits could be reduced by $5.4 million due to audit settlements, expiration of statute of limitations, or other resolution of uncertainties. The Company's policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognized $0.6 million of interest expense related to unrecognized tax benefits during fiscal 2020 and no such interest expense during fiscal 2019 and fiscal 2018.
Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The CARES Act includes, among other things, income tax provisions allowing for the temporary five-year carryback of net operating losses generated in 2018, 2019, and 2020, temporary modifications to the limitations placed on interest deductions, and technical corrections of tax depreciation methods for qualified improvement property ("QIP"), which changes 39-year property to 15-year property eligible for 100% tax bonus depreciation. In addition, the CARES Act includes provisions such as the temporary deferral of the employer portion of social security taxes incurred through the end of calendar 2020 and an employee retention credit for 50% of wages and health benefits paid to employees not providing services due to the COVID-19 pandemic. The Company has made estimates of the effect of the CARES Act and will adjust estimates, if needed, as new legislation or guidance becomes available.
As a result of the faster tax depreciation methods allowed under the CARES Act for QIP and the retroactive application of those methods for QIP placed in service during fiscal 2018 and 2019, the Company incurred a fiscal 2019 net operating loss for federal income tax purposes that was carried back to prior years during which the federal tax rate was 35%, resulting in a $7.7 million income tax benefit during the second quarter of fiscal 2020. The Company received $28.4 million of cash refunds related to the accelerated QIP depreciation and the carry back of the fiscal 2019 net operating loss as of December 31, 2020.
As of December 31, 2020, the Company has deferred $12.1 million of employer social security taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. Of the deferred employer social security taxes outstanding as of December 31, 2020, approximately $6.1 million is included in accrued expenses and other current liabilities and $6.0 million is included in other liabilities within the Condensed Consolidated Balance Sheets.
The Company recorded $1.7 million of employee retention credits during the fiscal year ended December 31, 2020, of which $1.5 million was recognized as an offset to selling and store operating expenses and $0.2 million was recognized as an offset to general and administrative expenses within the condensed Consolidated Statements of Operations and Comprehensive Income.