How does Sonesta Select Sonesta Essential account for income taxes?
Sonesta_Select_Sonesta_Essential Franchise · 2025 FDDAnswer from 2025 FDD Document
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. At December 31, 2024 and 2023, a partial valuation allowance was recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We classify any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments as components of income tax expense.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 84)
What This Means (2025 FDD)
According to Sonesta Select Sonesta Essential's 2025 Franchise Disclosure Document, the company uses the asset and liability method for accounting for income taxes. This method involves recognizing deferred tax assets and liabilities based on the expected future tax consequences of events already included in the financial statements. These assets and liabilities are determined by looking at the differences between the financial statement and tax bases of assets and liabilities, using the tax rates that are expected to be in effect when these differences reverse. Any changes in tax rates will impact income in the period when the enactment date occurs.
Sonesta Select Sonesta Essential recognizes deferred tax assets if they believe the assets are more likely than not to be realized. This determination involves considering all available positive and negative evidence, including future reversals of taxable temporary differences, projected future taxable income, tax planning, and recent operational results. As of December 31, 2024 and 2023, a partial valuation allowance was recorded to reduce deferred tax assets to an amount that is more likely to be realized. If the company determines that they can realize deferred tax assets in excess of their net recorded amount in the future, they would adjust the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
For a prospective franchisee, understanding these accounting methods is crucial as it impacts the overall financial health and tax obligations of Sonesta Select Sonesta Essential. The FDD also states that any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments are classified as components of income tax expense. This means that franchisees should be aware of the importance of timely and accurate tax payments to avoid additional expenses. Furthermore, in December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which may impact the company's future financial statements.