Income Taxes

The benefit for income taxes for the three and nine months ended September 28, 2014 and September 29, 2013 was comprised of the following:



	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013
Current	$	—		$	(4,269	)	$	219		$	(4,282	)
Deferred	(2,632		)	2,532			(7,774		)	(4,438		)
	$	(2,632	)	$	(1,737	)	$	(7,555	)	$	(8,720	)

The benefit for income taxes for the three and nine months ended September 28, 2014 was derived using an estimated effective annual income tax rate for 2014 of 37.5%, which excluded any discrete tax adjustments. The Company's estimated effective tax rate for 2014 does not include any Work Opportunity Tax Credits for qualifying employees hired in 2014 as this expired at the end of 2013. The credit for such employees will be reflected in the Company's estimated effective tax rate in the period when and if re-enacted into law. Other discrete tax adjustments increased the benefit for income taxes by $0.5 million and $0.6 million in the three and nine months ended September 28, 2014, respectively, which included $0.5 million in employment tax credits relating to periods prior to the tax credit's expiration.

The benefit for income taxes for the three and nine months ended September 29, 2013 was derived using an estimated effective annual income tax rate for 2013 of 39.9%, which excluded any discrete tax adjustments. In January 2013, the United States Congress authorized, and the President signed into law, certain federal tax credits that were reflected in the Company's Federal tax return for 2012. However, since the law was enacted in 2013, the financial statement benefit of such credits totaling $1.0 million was recorded in the first quarter of 2013 and is included in the benefit for income taxes in the consolidated statement of operations and comprehensive loss for the nine months ended September 29, 2013. Other discrete tax adjustments increased the benefit for income taxes by $0.1 million in the three months ended September 29, 2013 and decreased the benefit for income taxes by $0.3 million for the nine months ended September 29, 2013.

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 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 its 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 and prospective operating results, the ability to carry-back net operating losses generated through December 30, 2012 against taxable income reported in prior years, and that the first year of expiration of its net operating loss carryforwards is 2033. The Company also considered subjective evidence related to the forecast of expected operating results for the years over the carryforward period. 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. While the Company’s performance for the nine months ended September 28, 2014 did not meet previous projections, management has considered the financial results in the third quarter compared to the first and second quarter of 2014, as well as the potential accretive impact of closing underperforming restaurants and acquiring additional restaurants in 2014 within its forecast of their future performance. Based on the analysis of positive and negative evidence, the Company believed that there was enough positive evidence to overcome its cumulative loss position at September 28, 2014, and therefore no valuation allowance of its deferred tax assets of $17.7 million was necessary. As disclosed in Note 1, the Company has acquired 94 restaurants in the fourth quarter of 2014. Management recognizes that the future performance of such restaurants, and the judgments associated with projected cash flows for the 2014 acquisitions are impactful to the Company's analysis of positive and negative evidence, and its continued evaluation of the recoverability of deferred income tax assets. In future periods, if the negative evidence outweighs the positive evidence, the Company would need to record a valuation allowance equal to the full amount of the net deferred tax asset balance at that time.

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.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 28, 2014 and December 29, 2013, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions.

The tax year 2013 remains 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 the uncertainties regarding the timing of any examinations, the Company does not expect unrecognized tax benefits to significantly change in the next twelve months.