Income Taxes

12 Months Ended

Jan. 01, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	Year ended
	January 1, 2023		January 2, 2022		January 3, 2021
Current:
Federal	$	—	$	—	$	—
State	(37)		(36)		268
	(37)		(36)		268
Deferred:
Federal	(16,790)		(12,374)		(6,039)
State	(5,027)		(4,021)		(1,073)
	(21,817)		(16,395)		(7,112)
Increase in valuation allowance	21,065		11,272		13,138
Provision (benefit) for income taxes	$	(789)	$	(5,159)	$	6,294

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 1, 2023 and January 2, 2022 were as follows:

	January 1, 2023		January 2, 2022
Deferred income tax assets:
Operating lease liabilities	$	211,000	$	217,236
Federal net operating loss carryforwards	26,122		26,839
Tax credit carryforwards	43,906		39,965
State net operating loss carryforwards	8,216		6,837
Interest expense limitation under section 163 (j)	8,090		1,345
Stock-based compensation expense	1,467		1,683
Accrued vacation benefits	2,904		2,844
Postretirement benefit obligations	721		766
Intangible Assets	757		—
Other deferred income tax assets	5,981		6,507
Gross deferred income tax assets	309,164		304,022
Less: Valuation allowance	(44,263)		(24,410)
Total deferred income tax assets	$	264,901	$	279,612
Deferred income tax liabilities:
Operating right-of-use assets	(195,705)		(202,887)
Property and equipment depreciation	(12,247)		(18,092)
Franchise rights	(61,755)		(63,030)
Accumulated other comprehensive income-postretirement benefits	(386)		(380)
Accumulated other comprehensive income-accrued interest rate swap	(2,160)		(161)
Other deferred income tax liabilities	(313)		(2,679)
Total deferred income tax liabilities	(272,566)		(287,229)
Net long-term deferred income tax liabilities	$	(7,665)	$	(7,617)

The Company's federal net operating loss carryforwards generated prior to December 31, 2017 expire beginning in 2035. Federal net operating losses generated subsequent to 2017 have no expiration date. As of January 1, 2023, the Company had federal net operating loss carryforwards of approximately $124.4 million, general business credits ("GBC") carryforwards of $43.9 million and approximately $170.5 million in state net operating loss carryforwards. The Company's GBC carryforwards begin to expire in 2031 and state net operating loss carryforwards begin to expire in 2023.

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 1, 2023 and January 2, 2022. 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 1, 2023, 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 1, 2023 and January 2, 2022 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 1, 2023 and January 2, 2022, the Company determined the valuation allowance needed for certain federal income tax credits, federal net operating losses and state net operating losses that may expire prior to their utilization by the Company was $44.3 million and $24.4 million, respectively. The amount of the deferred tax asset to be 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 $21.1 million, $11.3 million and $13.1 million in fiscal 2022, 2021 and 2020, respectively, relative to this valuation reserve.

The Company records goodwill as a result of acquisitions which is not amortized for financial reporting purposes, however, has a tax deductible life of 15 years. This results in a deferred tax expense and deferred tax liability for the indefinitely lived asset which is known as a naked credit. The deferred tax liability will have an indefinite life and is expected to increase over the 15-year amortization period. Due to the indefinite life of the cumulative losses the Company incurred in 2021 and 2022, the federal deferred tax liability from amortization of the goodwill was offset against the federal operating net losses to the extent allowed. The remaining deferred tax liability may remain on the Company's consolidated balance sheet indefinitely unless there is a financial statement impairment of goodwill recorded, or if a portion of the business is sold. Due to the potential for an indefinite life of the previously mentioned liability, it is not netted against the deferred tax assets for purposes of determining the required valuation allowance.

A reconciliation of the statutory federal income tax provision to the income tax provision (benefit) for the years ended January 1, 2023, January 2, 2022, and January 3, 2021 was as follows:

	Year ended
	January 1, 2023		January 2, 2022		January 3, 2021
Statutory federal income tax provision (benefit)	$	(16,036)	$	(10,119)	$	(4,865)
State income taxes, net of federal benefit	(4,085)		(2,934)		(726)
Employment tax credits	(2,817)		(3,274)		(2,585)
Change in valuation allowances	21,065		11,272		13,138
Non-deductible expenses	597		431		214
Stock-based compensation	684		127		525
Rate change	—		(163)		312
Miscellaneous	(197)		(499)		281
Provision (benefit) for income taxes	$	(789)	$	(5,159)	$	6,294

The Company's policy is to recognize interest and/or penalties related to uncertain tax positions in income tax expense. At January 1, 2023 and January 2, 2022, the Company had no unrecognized tax benefits and no accrued interest related to uncertain tax positions. The tax years 2017 - 2021 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 1, 2023, the Company expects that the carryback of net operating losses will not have an impact on its current tax attributes.