What happens if it is more likely than not that some of Carbones Pizzeria's deferred tax assets will not be realized?

According to the 2025 Carbones Pizzeria Franchise Disclosure Document, if it is more likely than not that some or all of the deferred tax assets will not be realized, a valuation allowance is recorded for carryforwards and other deferred tax assets. Carbones Pizzeria considers 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.

In simpler terms, this means that Carbones Pizzeria acknowledges that it might not be able to use all of its deferred tax assets (like carryforwards, which are losses that can be used to offset future income) to reduce future tax obligations. To account for this possibility, the company sets aside a "valuation allowance," which is like a reserve. The amount of this allowance is based on Carbones Pizzeria's assessment of how likely it is that they won't be able to use those tax assets, considering factors like their past income, future income projections, and any tax strategies they might use.

For a prospective franchisee, this accounting practice indicates that Carbones Pizzeria is taking a conservative approach to its financial reporting. It suggests that the company is not overly optimistic about its future profitability and is prepared for the possibility that it may not be able to fully utilize its tax benefits. While this doesn't directly impact the franchisee's operations, it provides insight into the financial management and risk assessment practices of the franchisor, which can be a factor in evaluating the overall stability and reliability of the franchise system.