What tax rates are used to measure deferred tax assets and liabilities for Carbones Pizzeria?
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 FDD, Carbones Pizzeria measures deferred tax assets and liabilities 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. This means that the company estimates future tax rates and uses those to calculate the value of deferred tax items on their balance sheet. Any change in tax rates will affect the deferred tax assets and liabilities, and this effect is recognized in income during the period that includes the enactment date.
This accounting method reflects the anticipated future tax impact of current business decisions and financial reporting. It is important to note that a valuation allowance is recorded for carryforwards and other deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. 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.
For the year ended October 31, 2024, the effective tax rate was 29%, differing from the statutory federal rate of 21% due to non-deductible depreciation expense and changes in accruals. For the year ended October 31, 2023, the effective tax rate was 36%, also differing from the statutory federal rate of 21% due to similar factors. These differences highlight that the actual tax paid or received by Carbones Pizzeria can vary significantly from the standard federal rate due to specific accounting and tax considerations.
For a prospective franchisee, this means that understanding tax laws and accounting practices is crucial for assessing the financial health and future tax obligations of Carbones Pizzeria. Franchisees should be aware that deferred tax assets are not guaranteed and depend on future profitability and tax law changes. It is advisable to consult with a financial professional to fully understand the implications of these tax policies.