What is the impact of deferred income taxes on the financial statements of Sonesta Simply Suites?
Sonesta_Simply_Suites Franchise · 2025 FDDAnswer from 2025 FDD Document
market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.
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.
Advertising and Promotion
Costs associated with advertising and promotional efforts are generally recognized as incurred.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The primary objective of this update is to enhance an entity's income tax disclosures, providing investors with better insights into how an entity's operations, tax risks, and planning, impact its tax rate and prospects for future cash flows. Under the ASU, entities are required to annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate. For non-public entities, ASU No. 2023-09 is effective for annual periods beginning after December 15, 2025. We are currently assessing the potential impact the adoption of ASU No. 2023-09 will have on our consolidated financial statements.
4.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Sonesta Simply Suites'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, reflecting the expected future tax consequences of events already included in the financial statements. These deferred tax assets and liabilities are determined by assessing the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates expected for the years in which these differences will reverse. Any changes in tax rates will impact the income in the period that includes the enactment date.
Sonesta Simply Suites recognizes deferred tax assets if it is more likely than not that these assets will be realized. This determination involves considering positive and negative evidence, such as 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 deemed more likely to be realized. If the company later determines it can realize deferred tax assets beyond their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, reducing the provision for income taxes.
Furthermore, the FDD states that Sonesta Simply Suites classifies any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments as components of income tax expense. As of December 31, 2024 and 2023, the company had federal and state net operating loss carryforwards of $58.8 million and $47.8 million, respectively. The federal operating loss carryforwards can be carried forward indefinitely but are subject to annual deduction limitations under the 2017 Tax Cuts and Jobs Act. The state net operating loss carryforwards started to expire beginning in 2021; the tax credit carryforwards began to expire in 2024.
For the years ended December 31, 2024, 2023 and 2022, Sonesta Simply Suites's provision for income taxes is $0.1 million, $0.1 million, and $0.4 million respectively, and the related effective tax rate is (4.94)%, 6.57%, and (15.9)%, respectively. For the periods during 2024, 2023, and 2022, the provisions for U.S., state, and foreign income taxes, if any, are included below (in thousands).
For a prospective franchisee, understanding these accounting practices is crucial for interpreting Sonesta Simply Suites's financial statements and assessing the company's financial health. The use of valuation allowances and the management of net operating loss carryforwards can significantly impact the reported income and tax liabilities, affecting the overall profitability and financial stability of the franchise system.