INCOME TAXES

12 Months Ended

Dec. 29, 2019

Income Taxes

Income Taxes

(12)        INCOME TAXES

For financial reporting purposes, income (loss) before income taxes consists of the following components for the periods presented:

	Year Ended
(in thousands)	December 29, 2019		December 30, 2018
United States	$	(2,072)	$	5,370
Foreign		166		221
Total	$	(1,906)	$	5,591

The following table summarizes the income tax (expense) benefit for the periods presented:

	Year Ended
(in thousands)	December 29, 2019		December 30, 2018
Current:
Federal	$	(10)	$	4
State		(48)		(17)
Foreign		(25)		(77)
		(83)		(90)
Deferred:
Federal		603		(532)
State		139		(107)
		742		(639)
Total income tax (expense) benefit	$	659	$	(729)

The impact of uncertain tax positions taken or expected to be taken on income tax returns must be recognized in the financial statements at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

The following is a reconciliation of the beginning and ending amounts of gross unrecognized tax benefit for the periods presented:

(in thousands)
Balance at December 31, 2017		13
Decreases due to lapses of statutes of limitations		(5)
Balance at December 30, 2018		8
Decreases due to lapses of statutes of limitations		(4)
Balance at December 29, 2019	$	4

Substantially all of our unrecognized tax benefits, if recognized, would impact our effective tax rate.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The preparation of these income tax returns requires us to interpret and apply relevant federal and state income tax laws. It is common for federal and state taxing authorities to periodically examine filed tax returns. During these examinations, it is possible for taxing authorities to interpret facts or tax law differently than we do. As a result, we may be required to adjust tax liabilities affecting our effective tax rate. Tax years 2016 and forward remain subject to federal examination. Tax years 2015 and forward remain subject to state examination. It is possible that the liability associated with the unrecognized tax benefits will increase or decrease within the next 12 months. The expiration of statutes of limitations would decrease our unrecognized tax benefits by approximately $4,000.

We have significant net deferred tax assets (“DTA”), which results from the net temporary timing differences between amounts recorded within our consolidated financial statements in accordance with GAAP and such amounts measured in accordance with the laws of various taxing jurisdictions and as reported in our tax returns. A DTA generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. As of December 29, 2019, the majority of our DTA resulted from net operating loss and tax credit carryforwards, which will not be realized unless we generate taxable income in the future. We evaluate our net deferred tax asset on a quarterly basis to determine whether current facts and circumstances indicate that the DTA may not be fully realizable and we provide for valuation allowances on those portions of the DTA that we don’t expect to realize.

Significant judgment is required in determining the realizability of our DTA. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near and long-term financial outlook. After considering all available evidence both positive and negative, we concluded that recognition of valuation allowances for substantially all of our DTA was not required. We recognized a valuation allowance relating to certain state net operating losses for which we believe that is it more likely than not that the benefit will not be realized. In recognition of this risk, we have provided a valuation allowance of $1.3 million on the deferred tax asset related to these state net operating loss carryforwards.

The following is a summary of the components of our net deferred tax assets as of the periods presented:

(in thousands)	December 29, 2019		December 30, 2018
Deferred tax asset:
Deferred rent	$	—	$	411
Federal net operating loss carry-forwards		1,980		1,812
State net operating loss carry-forwards		1,993		4,130
Intangible property basis difference		(7)		131
Financing lease obligation		—		299
Tax credit carryover		2,581		2,164
Accrued expenses		168		205
Stock-based compensation		187		103
Deferred revenue		693		666
Lease reserve		8,060		107
Accrued and deferred compensation		53		36
Contribution carryover		50		46
Transaction and organization costs		121		—
Inventories		10		5
Total deferred tax asset	$	15,889	$	10,115
Deferred tax liability:
Property and equipment basis difference	$	(755)	$	(568)
Inventories		(146)		(83)
Prepaid expenses		(365)		(236)
Right of use asset		(6,664)		—
Total deferred tax liability	$	(7,930)	$	(887)
Net deferred tax assets		7,959		9,228
Valuation allowance		(1,313)		(3,481)
Deferred tax asset, net	$	6,646	$	5,747

During the year ended December 29, 2019, the net change in our DTA valuation allowance was approximately $2,168,000.

As of December 29, 2019, we had cumulative state net operating loss carry-forwards for tax reporting purposes of approximately $25.2 million and federal net operating loss carry-forwards for tax reporting purposes of $9.4 million which, if not used, will begin to expire in fiscal 2020 and 2038, respectively.

The following is a reconciliation from our statutory tax rate to our effective tax rate for the periods presented:

	Year Ended
	December 29, 2019		December 30, 2018
Federal statutory tax rate	21.0	%	21.0	%
State taxes, net of valuation allowance and federal benefit	(4.7)		2.2
Deferred rate change	11.9		(0.6)
Foreign taxes	(2.0)		1.4
Tax effect of permanent differences	0.5		(0.1)
Tax effect of general business credits	24.3		(3.4)
Tax effect of foreign tax credit	2.0		(3.2)
Uncertain tax positions	0.3		(0.1)
Return to provision update	(173.8)		(15.7)
Change in valuation allowance	171.8		11.5
Other	0.9		—
Effective tax rate	52.2	%	13.0	%