Red Robin Gourmet Burgers, 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. 27, 2020

Loss before income taxes includes the following components for the fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018 (in thousands):


	2020		2019		2018
U.S.	$	(262,728)	$	(14,549)	$	(16,045)
Foreign	(20,824)		(7,688)		(5,365)
Loss before income taxes	$	(283,552)	$	(22,237)	$	(21,410)

The benefit for income taxes for the fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018 consist of the following (in thousands):


	2020		2019		2018
Current:
Federal	$	(60,340)	$	(3,054)	$	2,043
State	1,354		(1,687)		1,579
Foreign	—		—		—
Total current income tax (benefit) expense	$	(58,986)	$	(4,741)	$	3,622
Deferred:
Federal	$	44,353	$	(10,994)	$	(16,688)
State	8,086		1,354		(2,068)
Foreign	(937)		47		143
Total deferred income tax expense (benefit)	51,502		(9,593)		(18,613)
Income tax benefit	$	(7,484)	$	(14,334)	$	(14,991)

The reconciliation between the income tax benefit and the amount of income tax computed by applying the U.S. federal statutory rate to loss before income taxes as shown in the accompanying consolidated statements of operations and comprehensive loss for fiscal years ended December 27, 2020, December 29, 2019, and December 30, 2018 is as follows:


	2020		2019		2018
Tax provision at U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
State income taxes	3.9		2.2		2.9
FICA tip tax credits	—		46.0		49.9
Foreign taxes versus U.S statutory rate	0.2		0.8		0.9
Valuation allowance on deferred income tax assets	(27.9)		(9.1)		(7.5)
Impact of CARES Act and related method changes	5.5		—		—
Other tax credits	—		6.1		7.1
Meals and entertainment	—		(0.7)		(0.8)
Excess stock options	(0.1)		(2.9)		(0.6)
Employee travel	—		(0.1)		(2.1)
Other	—		1.2		(0.8)
Effective tax rate	2.6	%	64.5	%	70.0	%

The Company had a tax benefit in all three years presented above, but due to the mathematical computation of tax benefit to book loss the effective tax rate in 2020, 2019 and 2018 are represented as a positive percentage. The decreases in the Company's effective tax benefit in 2020 is primarily a result of a decrease in tax credits and an increase in the valuation allowance, partially offset by a decrease in income and the favorable rate impact of net operating loss ("NOL") carrybacks allowed as part of the CARES Act. The decrease in the 2019 effective tax benefit is primarily attributable to a decrease in credits and an increase in the valuation allowance.

The Company's federal and state deferred taxes at December 27, 2020 and December 29, 2019 are as follows (in thousands):


	2020		2019
Deferred tax assets:
Leasing transactions	$	134,471	$	131,679
General business and other tax credits	40,366		40,409
Net operating loss carryover	23,567		5,346
Accrued compensation and related costs	11,893		5,970
Goodwill	9,536		—
Stock-based compensation	5,561		4,920
Advanced payments	4,702		3,597
Other non-current deferred tax assets	3,073		2,238
Subtotal	233,169		194,159
Valuation allowance	(86,677)		(7,293)
Total	$	146,492	$	186,866

Deferred tax liabilities:
Leasing transactions	$	(112,860)	$	(112,766)
Property and equipment	(21,549)		(757)
Supplies inventory	(4,267)		(4,611)
Prepaid expenses	(2,884)		(3,387)
Goodwill	—		(12,138)
Other non-current deferred tax liabilities	(4,932)		(1,680)
Total	$	(146,492)	$	(135,339)

Net deferred tax asset	$	—	$	51,527

The Company had net operating loss carryforwards for tax purposes of $23.6 million as of December 27, 2020. This is comprised of approximately $2.0 million of federal net operating loss carryovers, approximately $12.4 million of state net operating loss carryovers, and approximately $9.2 million of foreign net operating loss carryovers. The federal net operating loss has an indefinite carryforward period, the state net operating loss carryovers may expire between 2025 and 2040, and the foreign net operating loss carryovers may expire between 2035 and 2040.

As of December 27, 2020, the Company had a deferred tax asset of $39.2 million related to federal tax credits, which expire at various dates between 2037 and 2039. The Company also had a deferred tax asset of $1.2 million related to state tax credits which expire in 2024.

In assessing the realizability of deferred income tax assets, ASC 740 requires a more likely than not standard be met. If the Company determines that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established. The realization of deferred tax assets depends on the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies when making this determination. Due to the COVID-19 pandemic, the Company has experienced cumulative losses in recent years which is significant negative evidence that is difficult to overcome in order to reach a determination that a valuation allowance is not required. Projected future taxable income is positive subjective evidence but is not strong enough to overcome the recent cumulative loss objective evidence. Therefore, management determined that a full valuation allowance was required as of December 27, 2020.

Based on the Company's evaluation of its deferred tax assets, a valuation allowance of approximately $86.7 million has been recorded against the deferred tax asset for federal and state tax credits, federal and state deferred tax assets, all net operating loss carry forwards and the deferred taxes of our foreign subsidiary.

The following table summarizes the Company's unrecognized tax benefits at December 27, 2020 and December 29, 2019 (in thousands):


	2020		2019
Beginning of year	$	104	$	304
Increase due to current year tax positions	—		52
Due to decrease to a position taken in a prior year	(24)		(170)
Settlements	—		(16)
Reductions related to lapses	—		(66)
End of year	$	80	$	104

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $0.1 million. The Company does not anticipate significant changes in the aggregate amount of unrecognized tax benefits within the next 12 months, other than nominal tax settlements.