Income Taxes

12 Months Ended

Jan. 03, 2021

The provision (benefit) for income taxes was comprised of the following:


	Year ended
	January 3, 2021		December 29, 2019		December 30, 2018
Current:
Federal	$	—	$	(260)	$	—
State	268		119		326
	268		(141)		326

Deferred:
Federal	(6,039)		(9,768)		(598)
State	(1,073)		(2,214)		115
	(7,112)		(11,982)		(483)
Increase in valuation allowance	13,138		—		—
Provision (benefit) for income taxes	$	6,294	$	(12,123)	$	(157)

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 January 3, 2021 and December 29, 2019 were as follows:


	January 3, 2021		December 29, 2019
Deferred income tax assets:

Operating lease liabilities	$	219,096	$	218,503
Federal net operating loss carryforwards	28,880		30,588
Tax credit carryforwards	35,650		32,378
State net operating loss carryforwards	6,032		5,388
Interest expense limitation under section 163 (j)	—		2,558
Stock-based compensation expense	1,323		1,274
Accrued vacation benefits	2,684		2,440
Accrued interest rate swap	1,841		—
Postretirement benefit obligations	853		944
Other deferred income tax assets	4,345		4,690
Gross deferred income tax assets	300,704		298,763
Less: Valuation allowance	(13,138)		—
Total deferred income tax assets	$	287,566	$	298,763

Deferred income tax liabilities:
Operating right-of-use assets	(205,897)		(208,804)
Property and equipment depreciation	(26,056)		(29,685)
Franchise rights	(65,329)		(66,725)
Accumulated other comprehensive income-postretirement benefits	(474)		(280)
Other deferred income tax liabilities	(1,172)		(252)
Total deferred income tax liabilities	(298,928)		(305,746)
Net long-term deferred income tax liabilities	$	(11,362)	$	(6,983)

The Company's federal net operating loss carryforwards generated prior to December 31, 2017 expire beginning in 2033. Federal net operating losses generated subsequent to 2017 have no expiration date. As of January 3, 2021, the Company had federal net operating loss carryforwards of approximately $136.7 million and approximately $7.6 million in state net operating loss carryforwards. The Company's state net operating loss carryforwards expire beginning in 2021 through 2038.

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 at January 3, 2021 and December 29, 2019. Under ASC 740, the weight given to negative and positive evidence is commensurate only to the extent that such evidence can be objectively verified. ASC 740 prescribes that objective historical evidence, in particular the Company’s three-year cumulative loss position at January 3, 2021, be given a greater weight than subjective evidence, including the Company’s forecast of future taxable income, which include assumptions that cannot be objectively verified. In determining the likelihood of future realization of the deferred income tax assets as of January 3, 2021 and December 29, 2019 the Company considered both positive and negative evidence and weighted the effect of such evidence based upon its objectivity. Based on the required weight of evidence under ASC 740, as of January 3, 2021 the Company determined that a valuation allowance was needed for certain federal income tax credits in the amount of $13.1 million as they may expire prior to their utilization by the Company. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during

the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth. The company recorded income tax expense of $13.1 million in fiscal 2020 relative to this valuation reserve.

A reconciliation of the statutory federal income tax provision to the income tax provision (benefit) for the years ended January 3, 2021, December 29, 2019, and December 30, 2018 was as follows:


	Year ended
	January 3, 2021		December 29, 2019		December 30, 2018
Statutory federal income tax provision (benefit)	$	(4,865)	$	(9,249)	$	2,089
State income taxes, net of federal benefit	(726)		(1,655)		325
Employment tax credits	(2,585)		(2,938)		(3,059)
Change in valuation allowances	13,138		—		—
Non-deductible expenses	214		1,374		415
Stock-based compensation	525		308		(53)
Rate change	312		—		—
Miscellaneous	281		37		126
Provision (benefit) for income taxes	$	6,294	$	(12,123)	$	(157)

The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At January 3, 2021 and December 29, 2019, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2014 - 2020 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.

On March 27, 2020, the United States enacted the CARES Act as a response to the economic uncertainty resulting from COVID-19. The CARES Act includes modifications for net operating loss carryovers and carrybacks, limitations of business interest expense for tax, immediate refund of alternative minimum tax (AMT) credit carryovers as well as a technical correction to the Tax Cuts and Jobs Act of 2017, referred to herein as the U.S. Tax Act, for qualified improvement property. As of January 3, 2021, the Company expects that the carryback of net operating losses will not have an impact on its current tax attributes.