Income Taxes

6 Months Ended

Jun. 25, 2022

Income Taxes

12. Income Taxes

The Company is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to its allocable share of any taxable income or loss of EWC Ventures. The remaining share of EWC Ventures income or loss is non-taxable to the Company and is not reflected in current or deferred income taxes.

EWC Ventures is a limited liability company that is treated as a partnership for U.S. federal income tax purposes and for most applicable state and local income tax purposes. As a partnership, EWC Ventures is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by EWC Ventures is passed through to and included in the taxable income or loss of its members on a pro rata basis, subject to applicable tax regulations. Because EWC Ventures is our financial reporting predecessor and not subject to entity level income tax, no current or deferred income taxes were recorded for the 13 and 26 weeks ended June 26, 2021.

We recorded $19 and $46 in income tax expense for the 13 and 26 weeks ended June 25, 2022 primarily due to state income taxes. The effective tax rate was 0.9% and 0.8% for the 13 and 26 weeks ended June 25, 2022, respectively. The effective tax rate for both the 13 and 26 weeks ended June 25, 2022 differs from the U.S. federal statutory rate primarily due to the effects of decreases in the valuation allowance against our deferred taxes, non-taxable income attributable to non-controlling interest and the tax effects of stock compensation.

As of June 25, 2022, we continue to conclude that the negative evidence regarding our ability to realize our deferred tax assets outweighed the positive evidence, and the Company has a full valuation allowance against its federal and state net deferred tax assets. The Company has a history of cumulative pre-tax losses for the three previous fiscal years which we believe represents significant negative evidence in evaluating whether our deferred tax assets are realizable. Given these cumulative losses and lack of forecast history we do not believe we can rely on projections of future taxable income exclusive of reversing taxable temporary differences to support the realization of our deferred tax assets. In upcoming quarters, we will continue to evaluate both the positive and negative evidence surrounding our ability to realize our deferred tax assets.

Tax Receivable Agreement

As of June 25, 2022, future payments under the Tax Receivable Agreement (“TRA”) are expected to be $134,720. Payments made under the TRA represent payments that otherwise would have been made to taxing authorities in the absence of attributes obtained by us as a result of exchanges by our pre-IPO members. Such amounts will be paid only when a cash tax savings is realized as a result of attributes subject to the TRA. That is, payments under the TRA are only expected to be made in periods following the filing of a tax return in which we are able to utilize certain tax benefits to reduce our cash taxes paid to a taxing authority. The impact of any changes in the projected obligations under the TRA as a result of changes in the geographic mix of the Company’s earnings, changes in tax legislation and tax rates or other factors that may impact the Company’s tax savings will be reflected in other expense on the condensed consolidated statement of operations in the period in which the change occurs. As of June 25, 2022, the TRA liability recorded was $64,399 based on current projections of future taxable income taking into consideration the Company’s full valuation allowance against its net deferred tax asset.