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, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 12 – Income Taxes

The components of income before (benefit) provision for income taxes were as follows (in thousands):


	For the years ended December 31,
	2019		2018
Domestic	$	7,780	$	2,089
Foreign		2,199		2,531
Total	$	9,979	$	4,620

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


	For the years ended December 31,
	2019		2018
Current:
Federal	$	—	$	—
State and local		109		52
Foreign		546		630
Total current provision for income taxes		655		682
Deferred:
Federal		(9,242)		—
State and local		(2,600)		—
Foreign		33		31
Total deferred provision for income taxes		(11,809)		31
Total provision for income taxes	$	(11,154)	$	713

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


	For the years ended December 31,
	2019	2018
Income tax benefit at federal statutory rate	21.0 %	21.0 %
State and local taxes	0.6 %	11.2 %
FICA tip credit	(10.5)%	(17.1)%
Foreign rate differential	(0.8)%	0.3 %
Change in valuation allowance	(103.0)%	(15.5)%
Global intangible low-taxed income (“GILTI”)	3.9 %	9.2 %
Bargain purchase gain	(23.1)%	—%
Other items, net	0.1 %	6.3 %
Total income tax expense	(111.8)%	15.4 %

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,
	2019		2018
Deferred tax assets:
Deferred rent liabilities	$	2,502	$	2,524
Lease incentives		2,088		1,577
Stock compensation		401		417
FICA tip credit carryforward		5,575		4,255
Net operating loss		3,496		3,705
Goodwill		1,427		1,652
Inventory		6		12
Charitable contributions carryforward		—		39
Foreign tax credit carryforward		510		336
Deferred revenue		373		335
State and local tax credit carryforward		420		445
Expenses not deductible until paid		306		283
Basis in LLC interest		173		—
Total deferred tax assets		17,277		15,580
Deferred tax liabilities:
Depreciation and amortization		(8,835)		(4,031)
Basis in LLC interest		—		(526)
ASC 740‑10 liability		(181)		(190)
Total deferred tax liabilities		(9,016)		(4,747)
Valuation allowance		(510)		(10,795)
Net deferred tax assets	$	7,751	$	38

As of December 31, 2019, the Company has federal net operating loss (“NOL”) carryforwards of $13.9 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 2035 to 2037.

As of December 31, 2018, the Company had a valuation allowance of approximately $10.8 million against its deferred tax assets. As of December 31, 2019, the Company released approximately $10.3 million of the valuation allowance based on an assessment of the realizability of its deferred tax assets, resulting in a benefit for income taxes for the year ended December 31, 2019. The remaining valuation allowance of $0.5 million relates to foreign tax credits the Company does not expect to utilize as a result of generating income in a jurisdiction with a higher income tax rate than the U.S. The 2017 Tax Cuts and Jobs Act ("TCJA") lowered the U.S. corporate income tax from 35% to 21%.

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,
	2019		2018
Balance, beginning of year	$	807	$	685
Increase related to current year positions		209		219
Decrease related to prior period positions		(202)		(97)
Balance, end of year	$	814	$	807

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 2016 through 2018. The IRS conducted an examination into tax year 2015 and did not propose any changes. The Company’s state and local tax filings remain subject to examination for tax years 2016 through 2018. 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 2016 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 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 reflected the immediate tax effect of the TCJA. The TCJA contains several key provisions including:

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.