Chuy's Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

The provision for federal and state income taxes for the years ended December 31, 2017, December 25, 2016 and December 27, 2015 consisted of the following:



	2017			2016		2015
Current:
Federal	$	972		$	2,933	$	1,724
State	859			613		945
Total current income tax expense	1,831			3,546		2,669
Deferred:
Federal	(7,761		)	2,827		2,903
State	430			661		171
Total deferred income tax (benefit) expense	(7,331		)	3,488		3,074
Total income tax (benefit) expense	$	(5,500	)	$	7,034	$	5,743

In December 2017, the U.S. government enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). The Tax Act impacts the Company in many ways, most notably by a reduction in the federal statutory tax rate from 35% to 21% effective January 1, 2018. As a result of this change, we were required to revalue our deferred tax balances at the 21% rate, resulting in a non-recurring deferred tax balance adjustment with a corresponding decrease to the provision for income taxes of $11.7 million in the fourth quarter of 2017. The company recognized the income tax effects of the Tax Act in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance relating to the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. As such, the company’s financial results reflect the income tax effects of the Tax Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The company did not identify items for which the income tax effects of the Tax Act have not been completed and no significant provisional estimates were made as of December 31, 2017.

Temporary differences between tax and financial reporting basis of assets and liabilities which give rise to the deferred income tax assets (liabilities) and their related tax effects as of December 31, 2017 and December 25, 2016 are as follows:



	2017			2016
Deferred tax assets:
Accrued liabilities	$	12,819		$	17,236
General business tax credits	13,653			12,653
Stock-based compensation	1,024			1,222
Other	238			403
Total deferred tax assets	27,734			31,514
Deferred tax liability:
Intangibles	(7,394		)	(10,609		)
Prepaid expenses	(1,339		)	(1,673		)
Property and equipment	(25,439		)	(33,001		)
Total deferred tax liabilities	(34,172		)	(45,283		)
Deferred tax liabilities, net	$	(6,438	)	$	(13,769	)

December 31, 2017 deferred tax balances were measured using a 21% federal statutory rate as a result of the Tax Act as compared to 35% in previous years.

We had approximately $9.2 million of tax benefits ($3.3 million net of tax) related to excess stock compensation which was recorded to additional paid-in-capital during the fiscal year ended December 25, 2016. Under the "tax law ordering" method, as described in ASC 740, this amount was also used as tax deductions and reduced taxable income for fiscal year ended December 25, 2016. As of December 31, 2017, the Company has general business tax credits of $13.7 million expiring in 2035.

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. The Company believes that it will realize all of the deferred tax assets. Therefore, no valuation allowance has been recorded.

The following is a reconciliation of the expected federal income taxes at the statutory rate of 35% for the fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015 to the actual provision for income taxes:



	2017			2016			2015
Expected income tax expense	$	8,210		$	8,497		$	6,524
State tax expense, net of federal benefit	838			829			725
FICA tip credit	(2,250		)	(1,936		)	(1,924		)
Deferred tax balance adjustment	(11,696		)	—			—
Other	(602		)	(356		)	418
Income tax (benefit) expense	$	(5,500	)	$	7,034		$	5,743

Federal tax standards require that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The standards also require that changes in judgment that result in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the interim period in which the change occurs. As of December 31, 2017 and December 25, 2016 the Company recognized no liability for uncertain tax positions.

It is the Company’s policy to include any penalties and interest related to income taxes in its income tax provision. However, the Company currently has no penalties or interest related to income taxes.