How does Exit record interest and penalties related to income taxes?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
ated subleases at Note 7.
Deferred revenue
Franchise deferred revenue results from the initial, renewal, and assignment franchise fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement.
Compensated absences
Compensated absences for sick pay and personal time have not been accrued since they cannot be reasonably estimated. The Company's policy is to recognize these costs when actually paid.
Upper Midwest Realty, Inc. d.b.a. Exit Realty Upper Midwest 16 Notes to Financial Statements (continued) December 31, 2024, 2023, and 2022
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
The Company, with the consent of its stockholders, has elected under the Internal Revenue Service Code to be taxed as an S-corporation. In lieu of corporation income taxes, the stockholders of an S-corporation are taxed on their proportionate share of the Company's taxable income.
Therefore, these statements do not include any provisions for corporation income taxes, refunds, or deferred income taxes.
Uncertainty in income taxes
Management has determined that the Company does not have any uncertain tax positions and associated unrecognized benefits that materially impact the financial statements or related disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance that the Company's tax returns will not be challenged by the taxing authorities and that the Company or its stockholders will not be subject to additional tax, penalties, and interest as a result of such challenge. Generally, the Company's tax returns remain open for three years. The Company has adopted the policy of expensing any interest or penalties related to uncertain tax positions in other expenses on the Statements of Income (Loss). For the years ended December 31, 2024, 2023, and 2022, there were no such interest or penalty expenses.
Advertising costs
Advertising costs are generally charged to operations in the year incurred and totaled $2,417, $77,777, and $51,885 for the years ended December 31, 2024, 2023, and 2022, respectively.
During the years ended December 31, 2024, 2023, and 2022, the Company applied for reimbursements from Exit Realty Corp. International which totaled $67,089, $49,162, and $54,451, respectively, for advertising costs. These reimbursements are netted against advertising costs in the Statements of Income (Loss).
Certain accounts in the prior-year financial statements have been reclassified for comparative purposes to confirm with the presentation in the current-year financial statements.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, the company has a policy of expensing any interest or penalties related to uncertain tax positions. These expenses are recorded in other expenses on the Statements of Income (Loss).
For the years ending December 31, 2024, 2023 and 2022, Exit did not have any interest or penalty expenses related to uncertain tax positions. This indicates that, at least for those years, Exit did not face situations where it needed to account for potential tax-related penalties or interest payments.
Furthermore, Exit evaluates uncertainty in income tax positions based on a more-likely-than-not recognition standard. If this threshold is met, the tax position is measured at the largest amount that is greater than 50% likely of being realized upon ultimate settlement and is recognized in the company's financial statements. If applicable, Exit records interest and penalties as a component of income tax expense. As of December 31, 2024 and 2023, there were no accruals for uncertain tax positions. Tax years from January 1, 2021, through the current year remain open for examination by federal and state tax authorities.