El Pollo Loco 2015 Annual Report Download - page 79

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Table of Contents
EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Rent expense is
included in occupancy and other operating expenses on the consolidated statements of operations. The difference between rent expense and rent
paid is recorded as deferred rent, which is included in other noncurrent liabilities in the accompanying consolidated balance sheets. Percentage
rent expenses are recorded based on estimated sales or gross margin for respective restaurants over the contingency period.
Any leasehold improvements that are funded by lessor incentives under operating leases are recorded as leasehold improvements and amortized
over the expected lease term. Such incentives are also recorded as deferred rent and amortized as reductions to rent expense over the expected
lease term.
Income Taxes
The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax
assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the
Company assesses the probability that its net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative
evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a
valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized.
The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to
have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective
authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the
potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not”
criterion as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized
tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax
positions could result in adjustments to recorded amounts and may affect our results of operations, financial position and cash flows.
The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no
accrual for interest or penalties at December 31, 2014 and December 25, 2013, respectively, and has not recognized interest and/or penalties
during the years ended December 31, 2014, December 25, 2013, and December 26, 2012, respectively, since there are no material unrecognized
tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within in the next 12 months.
On July 30, 2014, the Company entered into an Income Tax Receivable Agreement (the “TRA”). The TRA calls for the Company to pay to its
pre-IPO stockholders 85% of the savings in cash that the Company realizes in its taxes as a result of utilizing its net operating losses and other
tax attributes attributable to preceding periods. In connection with the TRA, the Company had amended its first lien credit agreement (the “First
Lien Credit Agreement”) to permit dividend payments to the Company by its subsidiaries in amounts up to $11 million per fiscal year, not to
exceed $33 million in the aggregate, while the First Lien Credit Agreement was outstanding. In fiscal 2014, the Company incurred a charge of
approximately $41 million relating to the present value of its total
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