The ONE Group Hospitality, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income taxes

Income taxes

12 Months Ended

Dec. 31, 2015

Income Tax Disclosure [Abstract]

Income taxes

Income taxes:

The provision for income tax expense consists of the following:



	Year Ended
	December 31, 2015			December 31, 2014
Current tax expense:
Federal	$	—		$	110,966
State and local	533,815			361,281
Foreign	142,143			258,731
Total current tax expense	675,958			730,978
Deferred tax expense (benefit):
Federal	(7,631,243		)	(110,966		)
State and local	(2,310,424		)	197,276
Foreign	(50,778		)	—
Total deferred tax expense (benefit)	(9,992,445		)	86,310
Total income tax expense (benefit)	$	(9,316,487	)	$	817,288

The difference between the reported income tax expense and taxes determined by applying the applicable U.S. federal statutory income tax rate to (loss) income before taxes from continuing operations is reconciled as follows:



	Year ended
	December 31, 2015			December 31, 2014
Income (loss) from continuing operations before provision for income taxes
Domestic	$	(2,077,455	)	$	6,128,992
Foreign	(135,337		)	1,220,924

Total	$	(2,212,792	)	$	7,349,916



	Year ended
	December 31, 2015					December 31, 2014
Income tax expense (benefit) at federal statutory rate	$	(752,349	)	34.0	%	$	2,498,973		34.0	%
State and local taxes – current	42,227			(1.9	)%	238,445			3.3	%
State and local taxes (benefits) – deferred	(574,273		)	26.0	%	351,459			4.8	%
Transaction costs	—			—	%	21,320			0.3	%
FICA tip credit	(495,254		)	22.4	%	(654,968		)	(9.0	)%
Foreign rate differential	19,500			(0.9	)%	(156,383		)	(2.1	)%
Deferred tax from rate change from LLC to C corporation	—			—	%	1,617,800			22.1	%
Change in valuation allowance	(7,707,333		)	348.3	%	(3,061,841		)	(41.7	)%
Other items, net	150,995			(6.8	)%	(37,517		)	(0.5	)%
Total income tax expense	$	(9,316,487	)	421.1	%	$	817,288		11.2	%

In 2014, the Company increased its valuation allowance by $2,542,278. In June 2015, the Company made the decision to release the valuation allowance amounting to $7.7 million against its deferred tax assets net of deferred tax liabilities. Cumulative profitable quarters and projected future pretax income are sources of positive evidence that led the Company to conclude that it is more likely than not that it will realize its net deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The estimation of future taxable income and our ability to utilize deferred tax assets can significantly change based on future events, including our determination as to feasibility of certain tax planning strategies. Thus, recorded valuation allowances may be subject to material future changes.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are presented below:



	Year ended
	December 31, 2015			December 31, 2014
Deferred tax assets:
Deferred rent liabilities	4,027,504			2,441,728
Lease incentives	508,351			350,817
Stock compensation	563,582			249,690
FICA tip credit carryforward	1,421,757			767,816
Net operating loss	1,899,676			84,833
Goodwill	3,258,403			3,349,761
Derivative expense	42,899			2,622,848
Inventory	9,789			4,904
Charitable contributions carryforward	6,131			—
Foreign tax credit carryforward	109,957			—
Deferred revenue	471,710			—
State and local tax credit carryforward	243,508			—

Total deferred tax assets	12,563,267			9,872,397

Deferred tax liabilities:
Depreciation and amortization	(2,352,575		)	(2,129,646		)
Basis in LLC interest	(117,020		)	—
Total deferred tax liabilities	(2,469,595		)	(2,129,646		)

Valuation allowance	—			(7,707,333		)

Net deferred tax assets	$	10,093,672		$	35,418

The Company accounts for unrecognized tax benefits in accordance with the provisions of FASB guidance which, among other directives, requires uncertain tax positions to be recognized only if they are more likely than not to be upheld based on their technical merits. The measurement of the uncertain tax position is based on the largest benefit amount that is more likely than not (determined on a cumulative probability basis) to be realized upon settlement. The Company believes that its tax return positions are appropriate and supportable under relevant tax law. The Company believes the estimates and assumptions used to support its evaluation of tax benefit realization are reasonable. Accordingly, no adjustments related to uncertain tax benefits have been made to the consolidated financial statements for the years ended December 31, 2015 and 2014.

The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company receives an assessment for interest and penalties, it has been classified in the consolidated financial statements as income tax expense.

The Company’s U.S. Federal, state and local income tax returns prior to fiscal year 2011 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company’s foreign income tax returns prior to fiscal year 2011 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and therefore, no provision for domestic taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to domestic income taxes, offset (in whole or in part) by foreign tax credits, related to income and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred domestic income tax liability is impracticable due to the complexities associated with its hypothetical calculation. As of December 31, 2015, the accumulated undistributed earnings of the foreign subsidiaries is $1,281,071.

As of December 31, 2015, the Company has federal, state and foreign income tax net operating loss (NOL) carryforwards of $4,401,278, $4,049,558 and $190,060. The federal and state net operating loss will expire at various dates from 2033 to 2035. The foreign net operating losses can be carried forward indefinitely.