To what extent does Americas Best Value Inn recognize deferred tax assets?
Americas_Best_Value_Inn Franchise · 2025 FDDAnswer from 2025 FDD Document
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Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. At December 31, 2024 and 2023, a partial valuation allowance was recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We classify any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments as components of income tax expense.
Advertising and Promotion
Costs associated with advertising and promotional efforts are generally recognized as incurred.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The primary objective of this update is to enhance an entity's income tax disclosures, providing investors with better insights into how an entity's operations, tax risks, and planning, impact its tax rate and prospects for future cash flows. Under the ASU, entities are required to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate. For non-public entities, ASU No. 2023-09 is effective for annual periods beginning after December 15, 2025. We are currently assessing the potential impact the adoption of ASU No. 2023-09 will have on our consolidated financial statements.
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Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 70–71)
What This Means (2025 FDD)
According to Americas Best Value Inn's 2025 Franchise Disclosure Document, the company accounts for income taxes using the asset and liability method, which necessitates the recognition of deferred tax assets and liabilities. These are based on the expected future tax consequences of events already included in their financial statements. Deferred tax assets and liabilities are determined by the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates for the year in which these differences are expected to reverse. Any changes in tax rates will affect the recognition of these deferred tax assets and liabilities, impacting income in the period the change is enacted.
Americas Best Value Inn recognizes deferred tax assets if they believe these assets are more likely than not to be realized. This determination involves considering all available positive and negative evidence, including future reversals of taxable temporary differences, projected future taxable income, and tax-planning strategies. As of December 31, 2024 and 2023, a partial valuation allowance was recorded to reduce deferred tax assets to an amount that is more likely to be realized.
Specifically, the company had federal and state net operating loss carryforwards of $58.8 million and $47.8 million, respectively, as of December 31, 2024 and 2023. The federal operating loss carryforwards can be carried forward indefinitely but are subject to annual deduction limitations under the 2017 Tax Cuts and Jobs Act. The state net operating loss carryforwards started to expire beginning in 2021, and the tax credit carryforwards began to expire in 2024. A total valuation allowance of $20.0 million was recorded as of December 31, 2024, to reduce deferred tax assets to an amount that is more likely to be realized. If the company determines it can realize additional deferred tax assets, the tax benefits from any reversal of the valuation allowance will be accounted for as a reduction of income tax expense. For the years ended December 31, 2024, 2023 and 2022, their provision for income taxes is $0.1 million, $0.1 million, and $0.4 million respectively, and the related effective tax rate is (4.94)%, 6.57%, and (15.9)%, respectively.
For a prospective Americas Best Value Inn franchisee, understanding how the franchisor manages deferred tax assets and liabilities can provide insight into the company's financial health and tax planning strategies. The valuation allowance indicates that the company does not expect to realize the full value of its deferred tax assets, which could be due to uncertainties in future profitability or changes in tax laws. Franchisees may want to inquire about the specific factors contributing to the valuation allowance and the company's plans to improve its realization of deferred tax assets.