Income Taxes

12 Months Ended

Dec. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

10. INCOME TAXES

Beginning in 2022, the 2017 Tax Cuts and Jobs Act, as amended, eliminated current-year deductibility of research and experimentation ("R&E") expenditures and software development costs (collectively, "R&E expenditures") and instead requires the Company to charge its R&E expenditures to a capital account amortized over five years. For the 2023 tax year, the Company capitalized approximately $5.9 million of R&E expenditures for income tax purposes.

Income taxes consisted of the following for the fiscal years ended December 30, 2023 and December 31, 2022 (amounts in thousands):

	For the fiscal years ended
	December 30, 2023			December 31, 2022
Current income tax benefit:
Federal	$	(7,821	)	$	(2,323	)
State and local		2,334			658
Total Current	$	(5,487	)	$	(1,665	)
Deferred income tax expense (benefit):
Federal	$	523		$	(1,561	)
State and local		492			1,446
Total Deferred	$	1,015		$	(115	)
Total income tax benefit	$	(4,472	)	$	(1,780	)

A reconciliation of the difference between the federal statutory tax rate and the Company’s effective tax rate for income taxes for the fiscal years ended December 30, 2023 and December 31, 2022 is as follows (amounts expressed as a percentage):

	For the fiscal years ended
	December 30, 2023			December 31, 2022
U.S. Federal statutory income tax rate		(21.0	)		(21.0	)
State income taxes, net of federal tax benefits		1.4			0.3
Goodwill impairment		1.4			9.4
Other nondeductible expenses		0.4			0.2
Uncertain tax positions		(5.8	)		(0.4	)
Valuation allowance		20.8			11.6
Tax credits		(1.0	)		(0.1	)
Other		0.6			(0.3	)
Effective tax rate		(3.2	)		(0.3	)

Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of deferred tax assets and liabilities are as follows as of December 30, 2023 and December 31, 2022 (amounts in thousands):

	As of
	December 30, 2023			December 31, 2022
Deferred tax assets:
Estimated contractual adjustments	$	16,282		$	13,589
NOL, federal and state		24,952			30,175
Tax credits		2,134			2,688
Payroll related accruals		21,755			18,742
Intangible assets and goodwill		90,945			80,629
Interest expense limitation		80,644			59,871
Transaction costs		3,257			3,608
Accrued expenses		995			3,642
Lease liabilities		15,189			15,589
Stock compensation		10,164			8,481
Section 174 costs		2,706			1,079
Other		18			310
Gross deferred tax assets		269,041			238,403
Less: valuation allowance		(244,865	)		(203,370	)
Net deferred tax assets		24,176			35,033
Deferred tax (liabilities):
Property and equipment		(990	)		(1,363	)
Interest rate derivatives		(11,120	)		(18,456	)
Lease right of use assets		(12,998	)		(14,254	)
Other		(3,927	)		(4,804	)
Gross deferred tax (liabilities)		(29,035	)		(38,877	)
Net deferred tax assets (liabilities)	$	(4,859	)	$	(3,844	)

As of December 30, 2023, the Company had gross federal and state net operating loss (“NOL”) carryforwards of $21.2 million and $380.1 million, respectively. For those losses that have an expiration date, the carryforwards will expire at various dates from 2024 through 2042. For those losses incurred after 2017, there is no statutory time expiration for the federal and certain state NOLs. The Company also has unutilized Federal tax credits of approximately $1.6 million that will expire in years 2038 through 2042. A valuation allowance was established for federal and state losses and federal credits that the Company believes are not more likely than not to be realized in the near future.

Internal Revenue Code Sec. 163(j) limits the deduction for net interest expense that exceeds 30% of the taxpayer’s adjusted taxable income (“ATI”) for the years ended 2023 and 2022. Sec. 163(j) permits an indefinite carryforward of any disallowed business interest. As of December 30, 2023, the Company has $339.0 million of interest expense carryovers. The deferred tax asset associated with these interest expense carryovers of $80.6 million is partially offset by a valuation allowance as the Company believes the benefit of this carryover is not more likely than not to be realized in the future.

Annually, the Company assesses the future realization of the tax benefit of its existing deferred tax assets and determines whether a valuation allowance is needed. Based on the Company’s assessment, it is more likely than not that a portion of the deferred tax assets will not be realized in the future. As a result, the Company recorded a valuation allowance of $244.9 million against its deferred tax assets at December 30, 2023. The valuation allowance increased by $41.5 million from the $203.4 million valuation allowance recorded as of December 31, 2022. The increase is primarily related to new deferred tax assets associated with current year operations, including goodwill impairment. The Company will maintain the valuation allowance until an appropriate level of profitability is sustained or the Company is able to develop prudent and feasible tax planning strategies that enable management to conclude that deferred tax assets are realizable. The following table summarizes changes in the valuation allowance as of December 30, 2023 and December 31, 2022 (amounts in thousands):

	As of
	December 30, 2023		December 31, 2022
Beginning of year balance	$	203,370	$	105,000
Increases in valuation allowance		41,495		98,370
End of year balance	$	244,865	$	203,370

The Company is subject to U.S. federal and state income tax in multiple jurisdictions. With limited exceptions, years prior to the 2019 fiscal year are no longer open to U.S. federal, state, or local examinations by taxing authorities. The Company was under examination by the Internal Revenue Service (the “IRS”) for certain historical tax periods in fiscal years 2015, 2016 and 2017. As of December 30, 2023, the IRS and the Company effectively settled the examination, resulting in a re-measurement of certain of its Uncertain Tax Positions. Measurement of Uncertain Tax Positions that meet the more-likely-than-not recognition threshold shall consider the most probable outcome using the facts, circumstances, and information available at the reporting date. As a result of its effective settlement, the Company recognized $5.4 million of Unrecognized Tax Positions, not including accrued penalties and interest. The Company is not under any current income tax examinations by any state or local taxing authorities.

Uncertain Tax Positions

As of December 30, 2023 and December 31, 2022, the total unrecognized tax benefits were $1.7 million and $8.1 million, respectively, and accrued interest and penalties were $0.7 million and $1.8 million, respectively. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax benefit. If the Company were to prevail on all unrecognized tax benefits recorded, $2.4 million of tax benefit would impact the overall effective tax rate within the next 12 months. The following table, which excludes penalties and interest, summarizes changes in uncertain tax positions as of December 30, 2023 and December 31, 2022 (amounts in thousands):

	For the fiscal years ended
	December 30, 2023			December 31, 2022
Beginning of year balance	$	8,135		$	10,240
Settlements		(5,381	)		-
Lapse of limitations		(1,063	)		(2,105	)
End of year balance	$	1,691		$	8,135