Quarterly report pursuant to Section 13 or 15(d)

Income Taxes

v3.20.2
Income Taxes
 9 Months Ended
Sep. 27, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income TaxesOn March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. The CARES Act includes provisions that allow net operating losses in 2018, 2019 and 2020 to be carried back for up to five years and eliminates the 80% taxable income limitation on such net operating loss deductions if utilized before 2021. Additionally, the CARES Act includes an administrative correction of the depreciation recovery period for qualified improvement property ("QIP"), including certain restaurant leasehold improvement costs that will result in the acceleration of depreciation on these assets retroactive to 2018. As a result, we estimate we will receive federal tax refunds for a total of approximately $1.6 million.
The following is a reconciliation of the expected federal income taxes at the statutory rates of 21% for the thirteen and thirty-nine weeks ended September 27, 2020 and September 29, 2019:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019
Expected income tax (benefit) expense 693  (678) (2,250) 1,349 
State tax expense, net of federal benefit 216  (25) 108  470 
FICA tip credit (1,187) (729) (2,979) (3,205)
Deferred tax balance adjustment (a) 620  —  (1,016) — 
Other 134  19  500  166 
Income tax (benefit) expense 476  (1,413) (5,637) (1,220)
(a) Reflects the tax benefit recorded in the quarter associated with a carryback of federal net operating losses due to the CARES Act administrative correction of the deprecation recovery period for QIP.
Deferred tax assets were $9.1 million and $2.6 million as of September 27, 2020 and September 29, 2019, respectively. This increase is primarily related to an increase in the general business tax credits.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred taxes will not be realized. Both positive and negative evidence is considered in forming management’s judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. The tax benefits relating to any reversal of the valuation allowance on the deferred tax assets would be recognized as a reduction of future income tax expense. As of September 27, 2020 the Company believes that it will realize all of the deferred tax assets. Therefore, no valuation allowance has been recorded.
The Internal Revenue Service ("IRS") audited our tax return for the fiscal year 2016. In August 2020, the IRS issued a Notice of Proposed Adjustment to the Company asserting that the tenant allowances paid under our operating leases should be recorded as taxable income for years 2016 and prior. The Company disagrees with this position based on the underlying facts and circumstances as well as standard industry practice. The Company estimates if the IRS's position was upheld, the Company's tax liability could range between $0.5 million and $2.5 million. In accordance with the provisions of FASB Accounting Standards Codification Subtopic 740-10, Accounting for Uncertainty in Income Taxes, the Company believes that it is more likely than not that the Company's position will ultimately be sustained upon further examination, including the resolution of the IRS's appeal or litigation processes, if any. As a result, no additional accrual has been made as of September 27, 2020.
The tax years 2019, 2018 and 2017 remain open for IRS audit. The Company has received no notice of audit or any notifications from the IRS for any of the open tax years.