What happens to deferred tax assets for Checkersrallys if realization is unlikely?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company accounts for income taxes based upon the provisions of ASC 740, Income Taxes. Under the asset and liability method required by ASC 740, Income Taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets must be reduced by a valuation allowance when it becomes more likely than not that they will not be realized. Realization of the deferred tax assets is dependent on generating sufficient taxable income in the periods when the deferred tax assets are available to be utilized. The Company has recorded a valuation allowance against the deferred tax assets that are not realizable under this standard. The deferred tax assets are reviewed periodically for recoverability, and valuation allowances are adjusted as necessary. Under ASC 740, Income Taxes, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense or benefit in the period that includes the enactment date.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, deferred tax assets are reduced by a valuation allowance when it becomes more likely than not that they will not be realized. This means that Checkersrallys acknowledges that some of its recorded deferred tax assets may not provide a future benefit. This situation typically arises when a company has a history of losses or expects future profitability to be limited. The realization of these assets depends on Checkersrallys generating sufficient taxable income in the future when the deferred tax assets are available to be utilized.
The document states that Checkersrallys has recorded a valuation allowance against the deferred tax assets that are not realizable under this standard. This indicates that Checkersrallys has already assessed its deferred tax assets and determined that some portion is unlikely to be recovered. The deferred tax assets are reviewed periodically for recoverability, and valuation allowances are adjusted as necessary. This ongoing review ensures that the valuation allowance accurately reflects the current outlook for the company's future taxable income.
For a prospective franchisee, this information suggests that Checkersrallys has faced challenges in generating consistent profits, which could impact its ability to utilize certain tax benefits. While this doesn't directly affect the franchisee's individual tax situation, it's an indicator of the overall financial health and stability of the company. Franchisees should consider this information as part of their due diligence, evaluating the potential implications for Checkersrallys's long-term growth and support for its franchisees.