Income Taxes

The benefit for income taxes on income from continuing operations was comprised of the following:



	Year ended
	December 29, 2013			December 30, 2012			January 1, 2012
Current:
Federal	$	(4,325	)	$	(772	)	$	(6,606	)
State	212			78			117
	(4,113		)	(694		)	(6,489		)

Deferred (prepaid):
Federal	(5,561		)	(10,055		)	4,875
State	(1,347		)	(1,407		)	(47		)
	(6,908		)	(11,462		)	4,828
Valuation allowance	624			2,063			—
Benefit for income taxes	$	(10,397	)	$	(10,093	)	$	(1,661	)

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

The components of deferred income tax assets and liabilities at December 29, 2013 and December 30, 2012 were as follows:



	December 29, 2013			December 30, 2012
Current deferred income tax assets (liabilities):
Inventory and other reserves	$	(272	)	$	(486	)
Accrued vacation benefits	1,939			1,733
Accrued workers compensation	1,013			—
Accrued settlement costs	—			981
Other accruals	785			422
Current deferred income tax assets	3,465			2,650
Less: Valuation allowance	(269		)	(208		)
Total current deferred income tax assets	3,196			2,442
Long term deferred income tax assets (liabilities):
Deferred income on sale-leaseback of certain real estate	6,523			7,305
Lease financing obligations	212			198
Postretirement benefit obligations	1,363			1,452
Accumulated other comprehensive income-postretirement benefits	(444		)	(414		)
Stock-based compensation expense	290			329
Property and equipment depreciation	1,348			1,058
Federal net operating loss carryforwards	5,735			7,042
State net operating loss carryforwards	2,686			2,063
Other intangibles, net	2,748			2,856
Franchise rights	(23,868		)	(24,771		)
Occupancy costs	5,038			4,452
Tax credit carryforwards	5,721			984
Other	1,890			1,523
Long-term net deferred income tax assets (liabilities)	9,242			4,077
Less: Valuation allowance	(2,418		)	(1,855		)
Total long-term deferred income tax assets (liabilities)	6,824			2,222
Carrying value of net deferred income tax assets	$	10,020		$	4,664

The Company's federal and state net operating loss carryforwards expire in varying amounts through 2033. As of December 29, 2013, the Company had federal net operating loss carryforwards of approximately $16.4 million. The Company has recorded a deferred income tax asset of $5.7 million reflecting the benefit of these loss carryforwards.

The Company establishes a valuation allowance when it is necessary to reduce deferred tax assets to an amount for which realization is likely. The Company has performed the required assessment of positive and negative evidence regarding the realization of deferred income tax assets associated with federal net operating loss carryforwards in accordance with ASC 740. The Company considered all available positive and negative evidence to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of these deferred income tax assets. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which such evidence can be objectively verified.

In evaluating the objective evidence provided by historical results, the Company considered (among other things) the past three years of cumulative losses, projected reversal of deferred tax liabilities, recent improvements in operating results, the ability to carry-back net operating losses generated through December 30, 2012 against taxable income reported in prior years, and the year of expiration of its net operating loss carryforwards which is 2033. The Company also considered subjective evidence related to the forecast of expected operating results for the years over the carryforward period. The trends included in the projections of taxable income, as well as forecasts of expected operating results over the carryforward period, reflect the continued improvement in the operating results of the acquired BKC restaurants such that the Company will generate the requisite level of pre-tax income to realize the benefit of its deferred tax assets of $10.0 million at December 29, 2013. Additionally, the deferred tax liabilities the Company has considered in the assessment of the realization of deferred tax assets will reverse in the carryforward period and same jurisdiction. Based on the analysis of positive and negative evidence, the Company believed that there was enough positive evidence to overcome our cumulative loss position at December 29, 2013, and therefore no valuation allowance related to federal net operating losses was necessary.

The Company will continue to monitor and evaluate the positive and negative evidence considered in arriving at the above conclusion, in order to assess whether such conclusion remains appropriate in future periods.

Due to the Spin-off in 2012, the Company conducted an analysis of the impact of certain equity transactions of the Company's stockholders during the year ended December 30, 2012 had on the Company's ability to utilize its net operating losses. The analysis concluded that the Company incurred a change in ownership within the meaning of Section 382 of the Internal Revenue Code ("IRC Section 382"). In general, IRC Section 382 places annual limitations on the use of certain tax attributes such as net operating loss and tax credit carryforwards in existence at the ownership change date. The Company believes that the Section 382 limitation will not impact its realization of its tax assets.

The Company determined in 2012 that there were uncertainties relative to its ability to utilize the deferred income tax assets associated with certain state net operating loss carryforwards. In recognition of these uncertainties, the Company provided a valuation allowance of $2.1 million in 2012 and $0.6 million in 2013 on all of the deferred income tax assets as of December 30, 2012, representing a charge to income tax expense. If the Company determines that it is more likely than not that it will realize these deferred tax assets in the future, the Company will make an adjustment to the valuation allowance at that time. At December 29, 2013, the Company had a valuation allowance related to state net operating loss carryforwards of $2.7 million.

The estimation of future taxable income for federal and state purposes and the Company's ability to realize deferred tax assets pertaining to federal and state net operating loss carryforwards can significantly change based on future events and operating results. Thus, recorded valuation allowances may be subject to future changes that could have a material impact on the consolidated financial statements.

The Company's effective tax rate was 43.5%, 34.9% and 76.0% for the years ended December 29, 2013, December 30, 2012 and January 1, 2012, respectively. A reconciliation of the statutory federal income tax benefit to the tax benefit applied to income from continuing operations for the years ended December 29, 2013, December 30, 2012, and January 1, 2012 was as follows:



	Year ended
	December 29, 2013			December 30, 2012			January 1, 2012
Statutory federal income tax benefit	$	(8,371	)	$	(10,118	)	$	(765	)
State income taxes (benefit), net of federal benefit	(656		)	(688		)	46
Stock-based compensation expense	—			(657		)	336
Change in valuation allowance	624			2,063			—
Non-deductible expenses	19			14			242
Employment tax credits	(2,298		)	(353		)	(1,148		)
Miscellaneous	285			(354		)	(372		)
Benefit for income taxes from continuing operations	$	(10,397	)	$	(10,093	)	$	(1,661	)

The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At December 29, 2013 and December 30, 2012, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2009 - 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase within the next twelve months due to uncertainties regarding the timing of examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.

In September 2013, the IRS issued final regulations affecting costs to acquire, produce, or improve tangible property and re-proposed regulations affecting dispositions of tangible property. The final regulations are effective for taxable years beginning on or after January 1, 2014. The Company has evaluated the final regulations and does not expect the adoption of the regulations to have a material impact on its consolidated financial statements.