What does Carls consider when determining its current provision for income taxes?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
| 21,457 | | Total estimated future amortization income | $ 35,941 | | | |
Deferred franchise fees are recorded in other current liabilities and other long-term liabilities in our accompanying Consolidated Balance Sheets as of January 31, 2024 and January 31, 2023, respectively.
Income Taxes
We are included in the consolidated federal income tax returns and combined state income tax returns of CKE Holding Corporation ("CKE"). For the purpose of determining the income taxes attributable to CKE Restaurants and its subsidiaries, we prepare our income tax provision as if we were a separate taxpayer. As a result of this treatment, we make income tax payments to our corporate parent based upon our separate return taxable income. We additionally make income tax payments directly to federal, state, local and foreign taxing jurisdictions.
Our current provision for income taxes is based on our estimated taxable income in each of the jurisdictions in which we operate, after considering the impact on our taxable income of temporary differences resulting from disparate treatment of items, such as depreciation, interest expense, advertising funds, sale-leaseback transactions, various reserves, tax credits and net operating losses ("NOL"), for tax and financial reporting purposes. We record deferred income taxes for the estimated future income tax effect of temporary differences between the financial and tax bases of assets and liabilities using the asset and liability method. Deferred income tax assets are also recorded for NOL and income tax credit carryforwards. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable. In performing this analysis, we consider all available evidence, both positive and negative, including historical operating results, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards and potential tax planning strategies that may be employed to prevent NOL or tax credit carryforwards from expiring unused.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, the current provision for income taxes is based on the estimated taxable income in each jurisdiction where Carls operates. This estimation takes into account the impact of temporary differences resulting from how certain items are treated for tax and financial reporting. These items include depreciation, interest expense, advertising funds, sale-leaseback transactions, various reserves, tax credits, and net operating losses (NOL). These differences can arise because tax laws and financial reporting standards often treat these items differently.
Carls records deferred income taxes to account for the future income tax effects of these temporary differences between the financial and tax bases of assets and liabilities, using the asset and liability method. Deferred income tax assets are also recorded for NOL and income tax credit carryforwards. However, a valuation allowance is established to reduce the carrying amount of deferred income tax assets if it is deemed more likely than not that some or all of the tax benefit of these assets will not be realized. This allowance reflects the uncertainty in realizing future tax benefits.
Carls evaluates the realizability of deferred income tax assets quarterly, considering all available evidence, both positive and negative. This includes historical operating results, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income (excluding reversing temporary differences and carryforwards), and potential tax planning strategies to prevent NOL or tax credit carryforwards from expiring unused. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years when those temporary differences are expected to be recovered or settled. Any changes in tax rates will affect deferred income tax assets and liabilities, and the impact is recognized in income during the period that includes the enactment date.
It's important to note that Carls may take positions on income tax returns that differ from the treatment of the same items for financial reporting purposes. The ultimate outcome of these items will remain uncertain until the IRS or similar state taxing authority completes its examination or until the statute of limitations expires. This means that the actual tax liabilities could differ from the estimated provisions, which could impact Carls's financial statements.