Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes



The income tax expense for the years ended December 31, 2020 and 2019 consists of the following:


    December 31, 2020     December 31, 2019  
Current   $     $ 48,187  
Deferred     (36,443 )     653,790  
Change in valuation allowance     36,443       (652,679 )
U.S. Federal                
Deferred     5,765,837       (4,683,141 )
Change in valuation allowance     (5,815,197 )     4,662,699  
State and local                
Deferred     (103,357 )     (272,656 )
Change in valuation allowance     159,222       317,526  
    $ 6,505     $ 73,726  


The income tax expense using statutory U.S. federal tax rate of 21% is reconciled to the Company’s effective tax rate as of December 31, 2020 and 2019 is as follows:


    2020     2019  
Computed “expected” income tax benefit   $ (4,325,270 )   $ (3,647,623 )
State income taxes, net of federal benefit     (57,543 )     (367,974 )
Non-controlling interest           185,031  
Prior year true-ups other deferred tax balances     24,549       (323,763 )
Permanent items     2,500,281       37,480  
Foreign tax expense           48,187  
Rate change     (142,085 )      
Other     (248,955 )     59,421  
Adjustment to NOLs due to Merger     8,350,360        
Change in valuation allowance     (6,094,832 )     4,082,967  
    $ 6,505     $ 73,726  


Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for tax purposes. Major components of deferred tax assets at December 31, 2020 and 2019 were:

    2020     2019  
Net operating loss carryforwards   $ 6,802,404     $ 13,099,412  
Capital loss carryforwards     369,447        
Fixed assets and intangibles     1,118,850       1,058,814  
Section 1231 loss carryforwards     39,491       103,230  
Charitable contribution carryforwards     12,474       23,731  
Section 163(j) limitation     789,007       648,074  
Other           45,801  
Restaurant startup expenses     5,293        
Accrued expenses     915,177       946,040  
Deferred occupancy liabilities           37,044  
Contract liabilities     226,671       240,333  
Total deferred tax assets     10,278,814       16,202,479  
Deferred occupancy liabilities     (38,390 )      
Investments     (202,307 )     (328,825 )
Other     (30,833 )      
Total deferred tax liabilities     (271,530 )     (328,825 )
Net deferred tax assets     10,007,284       15,873,654  
Valuation allowance     (10,116,093 )     (15,975,958 )
    $ (108,809 )   $ (102,304 )


As of December 31, 2020, Company has U.S. federal and state net operating loss carryovers of approximately $26,200,000, which will expire at various dates beginning in 2031 through 2036, if not utilized with exception of loss carryovers generated in tax years after 2017. As a result of Tax Cut and Jobs Act of 2017, net operating losses generated in 2018 and beyond have indefinite lives. In accordance with Section 382 of the internal revenue code, deductibility of the Company’s U.S. net operating loss carryovers may be subject to an annual limitation in the event of a change of control as defined under the Section 382 regulations.


Based on prior acquisitions and ownership changes, the Company expects approximately $7.2 million of net operating loss carryforwards to be limited based on section 382.


In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. For the years ended December 31, 2020 and December 31, 2019 the change in valuation allowance was approximately $(5,860,000) and $4,083,000, respectively.


The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in their financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the company has taken or expects to take in its return. For those benefits to be recognized, a tax position must be more-likely-than- not to be sustained upon examination by taxing authorities. Differences between two positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing-authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.


Interest related to uncertain tax positions are required to be calculated, if applicable, and would be classified as “interest expense” in the consolidated and combined statements of operations. Penalties would be recognized as a component of “general and administrative expenses”. As of December 31, 2020 and 2019, no interest or penalties were required to be reported.


The Company previously did not record a provision for taxes on undistributed foreign earnings based on an intention and ability to permanently reinvest the earnings of its foreign subsidiaries in those operations. Under the Tax Cuts and Jobs Act, the Company has re-assessed its strategies by evaluating the impact of the Tax Cuts and Jobs Act on its operations. As a result of the Act, the Company analyzed if a liability needed to be recorded for the deemed repatriation of undistributed earnings. It was determined that there is no outstanding liability associated with this based on overall negative undistributed earnings (accumulated deficit) in the consolidated foreign group.


An additional provision of the TJCA is the implementation of the Global Intangible-Low Taxed Income Tax, or “GILTI.” The Company has elected to account for the impact of GILTI in the period in which the tax actually applies to the Company. During fiscal 2019, the Company incurred $157,000 of additional taxable income as a result of this provision. This increase of taxable income was incorporated into the overall net operating loss and valuation. Due to foreign losses in 2020, the impact of GILTI on taxable income is nil.