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, 2018

Note 11 - Income Taxes

The components of income (loss) from continuing operations before provision for income taxes for the periods were as follows (in thousands):

	For the years ended December 31,
	2018		2017
Domestic	$	2,089	$	(6,532	)
Foreign		2,531		2,707
Total	$	4,620	$	(3,825	)

The components of the Company’s provision for income taxes were as follows (in thousands):

	For the years ended December 31,
	2018		2017
Current:
Federal	$	—	$	—
State and local		52		38
Foreign		630		580
Total current provision for income taxes		682		618
Deferred:
Federal		—		—
State and local		—		—
Foreign		31		(18	)
Total deferred provision for income taxes		31		(18	)
Total provision for income taxes	$	713	$	600

The Company’s effective tax rate differs from the statutory rates as follows:

	For the years ended December 31,
	2018			2017
Income tax benefit at federal statutory rate		21.0	%		34.0	%
State and local taxes – current		0.9	%		(0.6	)%
State and local taxes – deferred		10.3	%		13.4	%
FICA tip credit		(17.1	)%		16.9	%
Foreign rate differential		0.3	%		8.6	%
Change in valuation allowance		(15.5	)%		(87.4	)%
Global intangible low-taxed income (“GILTI”)		9.2	%		—	%
Other items, net		6.3	%		(0.6	)%
Total income tax expense		15.4	%		(15.7	)%

The income tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):

	For the years ended December 31,
	2018			2017
Deferred tax assets:
Deferred rent liabilities	$	2,524		$	2,637
Lease incentives		1,577			1,484
Stock compensation		417			458
FICA tip credit carryforward		4,255			3,224
Net operating loss		3,705			5,129
Goodwill		1,652			1,839
Inventory		12			13
Charitable contributions carryforward		39			37
Foreign tax credit carryforward		336			566
Deferred revenue		335			383
State and local tax credit carryforward		445			346
Expenses not deductible until paid		283			—
Total deferred tax assets		15,580			16,116
Deferred tax liabilities:
Depreciation and amortization		(4,031	)		(3,661	)
Basis in LLC interest		(526	)		(592	)
ASC 740-10 liability		(190	)		(233	)
Total deferred tax liabilities		(4,747	)		(4,486	)
Valuation allowance		(10,795	)		(11,561	)
Net deferred tax assets	$	38		$	69

As of December 31, 2018, the Company has federal net operating loss (“NOL”) carryforwards of

$13.6

million. The Company has various state NOL carryforwards. The determination of the state NOL carryforwards is dependent upon apportionment percentages and state laws that can change from year to year and impact the amount of such carryforwards. The federal and state NOLs will expire at various dates from 2033 to 2037.

Uncertain tax positions

The following table summarizes the activity related to the Company’s uncertain tax positions (in thousands):

	For the years ended December 31,
	2018			2017
Balance, beginning of year	$	685		$	674
Increase related to prior period positions		—			—
Increase related to current year positions		219			203
Decrease related to prior period positions		(97	)		(192	)
Balance, end of year	$	807		$	685

The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company’s federal tax filings remain subject to examination for federal tax years 2015 through 2017. The IRS conducted an examination into tax year 2015 and did not proposed any changes. The Company’s state and local tax filings remain subject to examination for tax years 2015 through 2017. NOL carryforwards are subject to examination regardless of whether the tax year in which they are generated has been closed by statute. The amount subject to disallowance is limited to the NOL utilized. Accordingly, the Company may be subject to examination for prior NOL’s generated as such NOL’s are utilized.

The Company’s foreign income tax returns prior to fiscal year 2015 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

2017 Tax Act

In December 2017, the President signed The Tax Cuts and Jobs Act (the “TCJA”), which includes a broad range of provisions. Changes in tax law are accounted for in the period of enactment, and as a result, the 2017 consolidated financial statements reflect the immediate tax effect of the TCJA. The TCJA contains several key provisions including:

	·	A one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits (“E&P”);
	·	A reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017;
	·	The introduction of a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income (“GILTI”) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) partially offset by foreign tax credits; and
	·	Introduction of a territorial tax system beginning in 2018 by providing for a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries.

The TCJA imposes a one-time mandatory transition tax on accumulated foreign earnings and eliminates U.S. taxes on foreign subsidiary distributions. As a result, earnings in foreign jurisdictions are available for distribution to the U.S. without incremental U.S. taxes. The Company intends to repatriate these earnings from time to time and it estimates that it will not incur significant additional taxes related to such amounts, however the estimates are provisional and subject to further analysis.

Due to the complexities involved in accounting for the enactment of the TCJA, SAB 118 allowed companies to record provisional estimates of the impacts of the TCJA during a measurement period of up to one year from the enactment date. In order to estimate the impact of the one-time transition tax on accumulated foreign earnings, we used the retained earnings of our foreign subsidiaries as a proxy to calculate E&P for the tax provision for the year ended December 31, 2017. In 2018, we conducted an earnings and profit study to calculate the exact amount of deemed repatriation which was included in our 2017 income tax filing. The adjustment between the estimated and the actual amount was included as an adjustment to the tax provision for the year ended December 31, 2018. The adjustment was fully absorbed by our net operating loss carryforward.