What are the potential risks associated with the 'Deferred income taxes' for Sonesta Simply Suites?
Sonesta_Simply_Suites Franchise · 2025 FDDAnswer from 2025 FDD Document
[Item 21: FINANCIAL STATEMENTS]
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.
The Company is subject to federal and certain state income taxes on its taxable income and/or gross receipts notwithstanding its historical net operating losses. The company is subject to audit for tax years ending December 31, 2024, December 31, 2023 and December 31, 2022.
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 addresses income taxes using the asset and liability method, which involves recognizing deferred tax assets and liabilities based on the future tax consequences of events already included in the financial statements. These assets and liabilities are determined by the differences between financial statement and tax bases, using the enacted tax rates expected for the years when these differences reverse. Changes in tax rates will impact income in the period they are enacted.
Sonesta Simply Suites recognizes deferred tax assets only to the extent that they are more likely than not to be realized, considering both 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 that is 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.
The risks associated with deferred tax assets stem from the uncertainty of their realization. If Sonesta Simply Suites's future taxable income or other positive evidence does not materialize as expected, the company may not be able to utilize these deferred tax assets. This could result in a higher tax liability in the future, negatively impacting the company's financial performance. The valuation allowance reflects the company's current assessment of this risk, but changes in economic conditions, tax laws, or the company's performance could require adjustments to this allowance, further affecting the company's financial statements. Additionally, the company is subject to federal and certain state income taxes on its taxable income and/or gross receipts notwithstanding its historical net operating losses and is subject to audit for tax years ending December 31, 2024, December 31, 2023 and December 31, 2022.