How does Carbones Pizzeria record the tax effects of timing differences?
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 FDD, the company uses the asset and liability method for income taxes. This means they recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. These deferred tax assets and liabilities are measured using the enacted tax rates expected to apply when the differences are settled. Any changes in tax rates will affect these deferred tax assets and liabilities and are recognized in the income for the period that includes the enactment date.
Carbones Pizzeria will record a valuation allowance for carryforwards and other deferred tax assets if it's more likely than not that some or all of these assets won't be realized. The company considers all available evidence, both positive and negative, including historical taxable income, expectations, risks associated with future taxable income estimates, and tax planning strategies when assessing the need for a valuation allowance.
For the year ended October 31, 2022, the FDD states that certain revenue and charges to earnings differ in timing from those deducted for tax purposes, primarily related to allowances for doubtful receivables, accrued liabilities, depreciation, and net operating loss carryforwards. The tax effects of these differences are recorded as deferred income taxes. The company's policy is to evaluate the likelihood that its uncertain tax positions will prevail 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.