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. 25, 2016

Income before income taxes includes the following components for the fiscal years ended December 25, 2016, December 27, 2015, and December 28, 2014 (in thousands):



	2016			2015			2014

U.S.	$	7,806		$	64,668		$	42,898
Foreign	(3,018		)	(1,432		)	(1,039		)
	$	4,788		$	63,236		$	41,859

The provision (benefit) for income taxes for the fiscal years ended December 25, 2016, December 27, 2015, and December 28, 2014 consist of the following (in thousands):



	2016			2015			2014
Current:
Federal	$	2,503		$	6,427		$	5,169
State	2,078			4,455			3,895
Foreign	—			—			—
Deferred:
Federal	(9,407		)	4,013			1,146
State	(2,300		)	(1		)	(649		)
Foreign	189			638			(263		)
	$	(6,937	)	$	15,532		$	9,298

The reconciliation between the income tax provision and the amount of income tax computed by applying the U.S. federal statutory rate to income before the provision for income taxes as shown in the accompanying Consolidated Statements of Income for fiscal years ended December 25, 2016, December 27, 2015, and December 28, 2014 is as follows:



	2016		2015		2014
Tax provision at U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes	(3.0	)	4.3		5.1
FICA tip tax credits	(183.8	)	(12.8	)	(16.0	)
Foreign taxes versus U.S statutory rate	6.7		0.3		(0.1	)
Valuation allowance on deferred income tax assets	19.3		1.5		—
Other tax credits	(27.7	)	(3.6	)	(2.3	)
Meals and entertainment	6.6		0.6		0.6
Other	2.0		(0.7	)	(0.1	)
Effective tax rate	(144.9	)%	24.6	%	22.2	%

The decrease in the Company’s effective tax rate in 2016 is primarily attributable to decrease in earnings before income tax as well as an increase in the FICA tip tax credit. The increase in the Company’s effective tax rate in 2015 from 2014 was primarily attributable to the increase in earnings partially offset by an increase in the FICA tip tax credit.

The Company’s federal and state deferred taxes at December 25, 2016 and December 27, 2015 are as follows (in thousands):



	2016		2015
Deferred tax assets and (liabilities), net:
Deferred rent	20,039		17,978
Stock-based compensation	7,500		6,980
General business and other tax credits	13,982		3,275
Alternative minimum tax credits	1,241		1,262
Accrued compensation and related costs	9,431		11,862
Advanced payments	3,809		3,024
Other non-current deferred tax assets	4,696		4,277
Other non-current deferred tax liabilities	(2,790	)	(1,181	)
Goodwill	(12,004	)	(9,572	)
Property and equipment	(16,459	)	(24,792	)
Franchise rights	(840	)	744
Prepaid expenses	(6,046	)	(4,736	)
Supplies inventory	(7,495	)	(7,089	)
Subtotal	15,064		2,032
Valuation Allowance	(2,323	)	(1,910	)
Net deferred tax asset (liability)	12,741		122
Non-current deferred tax asset	13,206		397
Non-current deferred tax liability	(465	)	(275	)
Total	12,741		122

Realization of net deferred tax assets is dependent upon profitable operations and future reversals of existing taxable temporary differences. Based on the Company’s evaluation of its deferred tax assets, as of December 25, 2016, a valuation allowance of approximately $2.3 million has been recorded against the deferred tax asset for state income tax credits and the deferred taxes of our foreign subsidiary, including the net operating loss carry forward, in order to measure only the portion of the deferred tax assets that more likely than not will be realized. However, the amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carry forward period are increased or reduced or if there are differences in the timing or amount of future reversals of existing taxable temporary differences.

We do not provide for deferred taxes on the excess of the financial reporting basis over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. We intend to reinvest earnings from our foreign subsidiaries, if any, in those operations for the foreseeable future. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs and, accordingly, we do not provide for U.S. federal income and foreign withholding tax on these earnings. While we do not expect to repatriate cash to the U.S., if these funds were distributed to the U.S., in the form of dividends or otherwise, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

The Company has federal alternative minimum tax credits of $1.2 million available with no expiration date. The Company also has general business and other tax credits totaling $14.0 million available to offset future taxes which expire through 2036.

Pursuant to the guidance for uncertain tax positions, a taxpayer must be able to more likely than not sustain a position to recognize a tax benefit, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal and state returns are the 2011 through 2016 tax years.

The following table summarizes the Company’s unrecognized tax benefits at December 25, 2016 and December 27, 2015 (in thousands):



	2016			2015
Beginning of year	$	228		$	319
Increase due to current year tax positions	—			57
Due to decrease to a position taken in a prior year	—			(100		)
Settlements	(12		)	—
Reductions related to lapses	(46		)	(48		)
End of year	$	170		$	228

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $0.2 million. The Company does not anticipate significant changes in the aggregate amount of unrecognized tax benefits within the next twelve months, other than nominal tax settlements.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. Penalties are recorded in Interest income and other, net, and interest paid or received is recorded in Interest expense in the Consolidated Statements of Income. The Company recorded nominal interest expense on the identified tax liabilities in 2016, 2015, and 2014, and no penalties were recorded in those fiscal years.