To what extent does Sonesta Select Sonesta Essential recognize deferred tax assets?
Sonesta_Select_Sonesta_Essential Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
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 accounts for income taxes using the asset and liability method. This method necessitates the recognition of deferred tax assets and liabilities, which reflect the expected future tax consequences of events already included in the financial statements. These assets and liabilities are determined by assessing the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates applicable for the year in which these differences are expected to reverse. Any changes in tax rates will impact deferred tax assets and liabilities and are recognized in the income for the period that includes the enactment date.
Sonesta Select Sonesta Essential recognizes deferred tax assets to the extent that 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 existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. 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 than not to be realized. If Sonesta Select Sonesta Essential determines that it can realize deferred tax assets in the future beyond their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, reducing the provision for income taxes.
For prospective franchisees, this indicates that Sonesta Select Sonesta Essential is actively managing and accounting for its deferred tax assets in accordance with GAAP. The company's approach to recognizing these assets is conservative, as demonstrated by the partial valuation allowance, which reduces the assets to a more realistic realizable value. This also means that the company is aware of potential tax benefits that may arise in the future and is prepared to adjust its financial statements accordingly. This approach ensures that the financial statements accurately reflect the company's financial position and potential tax liabilities, which is crucial for making informed investment decisions.