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. 31, 2017

Income before income taxes includes the following components for the fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015 (in thousands):



	2017			2016			2015

U.S.	$	32,208		$	7,806		$	64,668
Foreign	(3,188		)	(3,018		)	(1,432		)
	$	29,020		$	4,788		$	63,236

The (benefit) provision for income taxes for the fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015 consist of the following (in thousands):



	2017			2016			2015
Current:
Federal	$	2,304		$	2,503		$	6,427
State	3,175			2,078			4,455
Foreign	—			—			—
Deferred:
Federal	(6,045		)	(9,407		)	4,013
State	(680		)	(2,300		)	(1		)
Foreign	247			189			638
	$	(999	)	$	(6,937	)	$	15,532

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 operations for fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015 is as follows:



	2017		2016		2015
Tax provision at U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes	5.0		(3.0	)	4.3
FICA tip tax credits	(32.4	)	(183.8	)	(12.8	)
Foreign taxes versus U.S statutory rate	0.7		6.7		0.3
Valuation allowance on deferred income tax assets	4.5		19.3		1.5
Deferred tax remeasurement due to the Tax Act	(9.7	)	—		—
Other tax credits	(6.5	)	(27.7	)	(3.6	)
Meals and entertainment	0.9		6.6		0.6
Other	(1.0	)	2.0		(0.7	)
Effective tax rate	(3.5	)%	(144.9	)%	24.6	%

The increase in the Company’s effective tax rate in 2017 is primarily attributable to the increase in earnings before income tax, partially offset by an increase in the FICA tip tax credit. In addition, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. We have recorded a decrease related to our deferred tax liabilities with a corresponding adjustment to deferred tax benefit. The decrease in the Company’s effective tax rate in 2016 from 2015 was primarily attributable to the decrease in earnings before income tax as well as an increase in the FICA tip tax credit.

The Company’s federal and state deferred taxes at December 31, 2017 and December 25, 2016 are as follows (in thousands):



	2017			2016
Deferred tax assets and (liabilities), net:
Deferred rent	$	14,024		$	20,039
Stock-based compensation	5,267			7,500
General business and other tax credits	18,269			13,982
Alternative minimum tax credits	—			1,241
Accrued compensation and related costs	6,496			9,431
Advanced payments	2,846			3,809
Other non-current deferred tax assets	5,250			4,696
Other non-current deferred tax liabilities	(2,013		)	(2,790		)
Goodwill	(9,850		)	(12,004		)
Property and equipment	(8,027		)	(16,459		)
Franchise rights	(23		)	(840		)
Prepaid expenses	(4,157		)	(6,046		)
Supplies inventory	(5,150		)	(7,495		)
Subtotal	22,932			15,064
Valuation Allowance	(3,742		)	(2,323		)
Net deferred tax asset	19,190			12,741
Non-current deferred tax asset	19,932			13,206
Non-current deferred tax liability	(742		)	(465		)
Total	$	19,190		$	12,741

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 31, 2017, a valuation allowance of approximately $3.7 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. The Company also assessed whether its valuation allowance analyses were affected by various aspects of the Tax Act, and concluded all deferred tax assets, except those already reduced due to a valuation allowance, will continue to be realized.

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. In addition, the international provisions of the Tax Act are not expected to have a material impact on the Company. We will continue to evaluate our estimates during the 12-month measurement period as additional information and regulatory interpretations become available

The Tax Act also repealed the corporate alternative minimum tax (“AMT”) for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. The Company has approximately $1.2 million of AMT credit carryovers that are expected to be fully refunded between 2018 and 2021.

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 2012 through 2017 tax years.

The following table summarizes the Company’s unrecognized tax benefits at December 31, 2017 and December 25, 2016 (in thousands):



	2017			2016
Beginning of year	$	170		$	228
Increase due to current year tax positions	172			—
Due to decrease to a position taken in a prior year	(2		)	—
Settlements	(11		)	(12		)
Reductions related to lapses	(42		)	(46		)
End of year	$	287		$	170

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $0.3 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.

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 operations. The Company recorded immaterial interest expense on the identified tax liabilities in 2017, 2016, and 2015, and no penalties were recorded in those fiscal years.