How does Carbones Pizzeria account for income taxes?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company accounts for income taxes under asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributed to temporary differences between the financial reporting basis and the respective tax basis of these assets and liabilities
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is recorded for carryforwards and other deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. Based on its facts, the Company considered all available evidence, both positive and negative, including historical levels of taxable income, expectations, and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to the 2025 Carbones Pizzeria Franchise Disclosure Document, the company accounts for income taxes using the asset and liability method. This approach necessitates the recognition of deferred tax assets and liabilities, which are based on the expected future tax consequences resulting from temporary differences between the financial reporting basis and the tax basis of the company's assets and liabilities. These deferred tax assets and liabilities are measured using the enacted tax rates anticipated to be in effect during the years when these differences are expected to be resolved.
Furthermore, the FDD states that any changes in tax rates will impact the measurement of these deferred tax assets and liabilities, with the effect being recognized in income during the period that includes the enactment date of the tax rate change. This means that if tax rates increase or decrease, Carbones Pizzeria will adjust its deferred tax assets and liabilities accordingly, and the impact of these adjustments will be reflected in the company's income statement for that period.
Carbones Pizzeria also considers the need for a valuation allowance for carryforwards and other deferred tax assets. A valuation allowance is recorded if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. The company assesses this by considering all available evidence, both positive and negative, including historical levels of taxable income, expectations, risks associated with estimates of future taxable income, and ongoing tax planning strategies. This assessment is crucial because it directly affects the amount of deferred tax assets that Carbones Pizzeria can recognize on its balance sheet.
In the 2022 FDD, it's noted that M&T, C&S, and CPI are corporations that provide for income taxes based on income reported for financial reporting purposes. Differences in timing between revenue and charges for financial reporting and tax deductions, primarily related to allowances for doubtful receivables, accrued liabilities, depreciation, and net operating loss carryforwards, are recorded as deferred income taxes. The company evaluates the likelihood of its uncertain tax positions prevailing upon examination, based on substantial support within the IRC, Regulations, Revenue Rulings, court decisions, and other evidence. Interest and penalties assessed by income taxing authorities are recorded in operating expenses. These accounting policies provide transparency into how Carbones Pizzeria manages and reports its income taxes, which is essential information for prospective franchisees.