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, 2015

Income before income taxes includes the following components for the fiscal years ended December 27, 2015, December 28, 2014, and December 29, 2013 (in thousands):



	2015			2014			2013

U.S.	$	64,668		$	42,898		$	41,249
Foreign	(1,432		)	(1,039		)	—
	$	63,236		$	41,859		$	41,249

The provision (benefit) for income taxes for the fiscal years ended December 27, 2015, December 28, 2014, and December 29, 2013 consist of the following (in thousands):



	2015			2014			2013
Current:
Federal	$	6,427		$	5,169		$	4,667
State	4,455			3,895			2,525
Foreign	—			—			—
Deferred:
Federal	4,013			1,146			2,755
State	(1		)	(649		)	(937		)
Foreign	638			(263		)	—
	$	15,532		$	9,298		$	9,010

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 27, 2015, December 28, 2014, and December 29, 2013 is as follows:



	2015		2014		2013
Tax provision at U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State income taxes	4.3		5.1		2.5
FICA tip tax credits	(12.8	)	(16.0	)	(14.8	)
Foreign taxes versus U.S statutory rate	0.3		(0.1	)	—
Valuation allowance on deferred income tax assets	1.5		—		—
Other tax credits	(3.6	)	(2.3	)	(2.5	)
Other	(0.1	)	0.5		1.6
Effective tax rate	24.6	%	22.2	%	21.8	%

The increase in the Company’s effective tax rate in 2015 is primarily attributable to the impact of the FICA tip tax credit to the increase in earnings before income taxes. The increase in the Company’s effective tax rate in 2014 from 2013 is primarily attributable to an increase in state income taxes.

The Company’s federal and state deferred taxes at December 27, 2015 and December 28, 2014 are as follows (in thousands):



	2015			2014
Current deferred tax assets and (liabilities), net:
Accrued compensation and related costs	$	—		$	10,941
Advanced payments	—			2,764
General business and other tax credits	—			(275		)
Interest rate swap	—			13
Other current deferred tax assets	—			3,583
Other current deferred tax liabilities	—			—
Prepaid expenses	—			(5,426		)
Supplies inventory	—			(6,923		)
Current deferred tax asset, net	—			4,677
Non-current deferred tax assets and (liabilities), net:
Deferred rent	17,978			16,900
Stock-based compensation	6,980			6,461
General business and other tax credits	3,275			5,551
Alternative minimum tax credits	1,262			1,262
Accrued compensation and related costs	11,862			2,067
Advanced payments	3,024			—
Other non-current deferred tax assets	4,277			413
Other non-current deferred tax liabilities	(1,181		)	(789		)
Goodwill	(9,572		)	(7,260		)
Property and equipment	(24,792		)	(25,369		)
Franchise rights	744			63
Prepaid expenses	(4,736		)	—
Supplies inventory	(7,089		)	—
Subtotal	2,032			(701		)
Valuation Allowance	(1,910		)	(990		)
Non-current deferred tax asset (liability), net, included in other non-current liabilities	122			(1,691		)
Net deferred tax asset (liability)	$	122		$	2,986

In 2015, the Company adopted new accounting guidance to present deferred tax assets and liabilities as non-current in the balance sheet and elected to apply the new guidance prospectively. Refer to Note 2, Recent Accounting Pronouncements, for additional information.

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 27, 2015, a valuation allowance of approximately $1.9 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 $1.3 million available with no expiration date. The Company also has general business and other tax credits totaling $3.3 million available to offset future taxes which expire through 2034.

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 2015 tax years.

The following table summarizes the Company’s unrecognized tax benefits at December 27, 2015 and December 28, 2014 (in thousands):



	2015			2014
Beginning of year	$	319		$	401
Increase due to current year tax positions	57			96
Due to decrease to a position taken in a prior year	(100		)	(5		)
Settlements	—			(122		)
Reductions related to lapses	(48		)	(51		)
End of year	$	228		$	319

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 2015, 2014, and 2013, and no penalties were recorded in those fiscal years.