INCOME TAXES

12 Months Ended

Oct. 03, 2020

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act made various tax law changes including among other things (i) modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes (ii) enhanced recoverability of AMT tax credit carryforwards (iii) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest, and (iv) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k).

As a result of the CARES Act, the Company recorded an income tax receivable of $2,673,000 as it is expecting to carryback its current year estimated taxable losses for fiscal year 2020 and recover prior taxes paid. The Company recorded an income tax benefit of $1,022,000 related to the carryback as the Company was subject to higher federal corporate income tax rates in prior periods than the current statutory tax rate of 21%. On November 18, 2020, the IRS issued Revenue Ruling 2020-27 that treats expenses funded by PPP loans as non-deductible for tax purposes if a business reasonably expects that a PPP loan will be forgiven in the future. Based on this Revenue Ruling 2020-27 and the uncertainty related to the PPP loan forgiveness in future periods as discussed in Note 10 - Notes Payable, the Company has treated these expenses as deductible in fiscal 2020. The Company will continue to evaluate the impact of this ruling on its consolidated financial statements and may be required to reverse its income tax receivable and related income tax benefits during future interim periods as each Borrower applies for forgiveness.

The provision for income taxes consists of the following:


	Year Ended
	October 3, 2020		September 28, 2019
	(in thousands)
Current provision (benefit):
Federal	$	(2,652)	$	260
State and local	58		267
	(2,594)		527
Deferred provision (benefit):
Federal	(780)		(931)
State and local	(1,011)		(187)
	(1,791)		(1,118)
	$	(4,385)	$	(591)

The effective tax rate differs from the U.S. income tax rate as follows:


	Year Ended
	October 3, 2020		September 28, 2019
	(in thousands)

Provision at Federal statutory rate (21%)	$	(1,891)	$	393
State and local income taxes, net of tax benefits	(919)		(160)
Tax credits	(542)		(1,029)
Income (loss) attributable to non-controlling interest	(15)		45
Changes in tax rates	(65)		2
Net operating loss carryback Federal rate benefit	(1,022)		—
Change in valuation allowance	21		81
Other	48		77
	$	(4,385)	$	(591)

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:


	October 3, 2020		September 28, 2019
	(in thousands)
Deferred tax assets:
State net operating loss carryforwards	$	5,427	$	4,406
Lease liabilities	10,729		422
Deferred compensation	358		313
Tax credits	1,862		1,253
Partnership investments	346		347
Other	550		—
Deferred tax assets, before valuation allowance	19,272		6,741
Valuation allowance	(413)		(392)
Deferred tax assets, net of valuation allowance	18,859		6,349
Deferred tax liabilities:
Depreciation and amortization	(12,440)		(2,049)
Prepaid expenses	(522)		(194)
Deferred tax liabilities	(12,962)		(2,243)
Net deferred tax assets	$	5,897	$	4,106

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. In the assessment of the valuation allowance, appropriate consideration was given to all positive and negative evidence including forecasts of future earnings and the duration of statutory carryforward periods. The Company recorded a valuation allowance of $413,000 and $392,000 as of October 3, 2020 and September 28, 2019, respectively, attributable to state and local net operating loss carryforwards which are not realizable on a more-likely-than-not basis. During the year ended October 3, 2020, the Company’s valuation allowance increased by approximately $81,000 as the Company determined that certain state net operating losses became unrealizable on a more-likely-than-not basis.

As of October 3, 2020, the Company had General Business Credit carryforwards of approximately $1,862,000 which expire through fiscal 2040. In addition, as of October 3, 2020, the Company has New York State net operating loss carryforwards of approximately $27,373,000 and New York City net operating loss carryforwards of approximately $25,873,000 that expire through fiscal 2040.

A reconciliation of the beginning and ending amount of unrecognized tax benefits excluding interest and penalties is as follows:


	October 3, 2020		September 28, 2019
	(in thousands)
Balance at beginning of year	$	158	$	110
Additions based on tax positions taken in current and prior years	19		407
Settlements	—		(205)
Lapse in statute of limitations	—		(109)
Decreases based on tax positions taken in prior years	(75)		(45)
Balance at end of year	$	102	$	158

The entire amount of unrecognized tax benefits if recognized would reduce our annual effective tax rate. For the years ended October 3, 2020 and September 28, 2019, there are no amounts accrued for the payment of interest and penalties. The Company does not expect a significant change to its unrecognized tax benefits within the next 12 months.

The Company files tax returns in the U.S. and various state and local jurisdictions with varying statutes of limitations. The 2017 through 2020 fiscal years remain subject to examination by the Internal Revenue Service and most state and local tax authorities. The Company is currently under examination by the Internal Revenue Service for tax year ended September 2017. The examination is in its preliminary phases.