Einstein Bros 2007 Annual Report Download - page 75

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liabilities using the enacted statutory tax rate in effect for the year differences are expected to be taxable or refunded. Deferred income tax
expenses or credits are based on the changes in the asset or liability from period to period. The recorded deferred tax assets are reviewed for
impairment on a quarterly basis by reviewing our internal estimates for future net income. Due to the uncertainty of future taxable income, deferred
tax assets resulting from these net operating losses have been fully reserved. To date we have incurred substantial net losses, with the exception of
2007, that have created significant net operating loss carryforwards ("NOL's") for tax purposes. Our NOL's are one of our deferred income tax
assets.
In accordance with SFAS No. 109 Accounting for Income Taxes ("SFAS No. 109"), we will assess the continuing need for a valuation
allowance that results from uncertainty regarding our ability to realize the benefits of our deferred tax assets. The ultimate realization of deferred
income tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become
deductible. Although we achieved $12.6 million of net income for 2007, we will continue to review various qualitative and quantitative data,
including events within the restaurant industry, the cyclical nature of our business, our future forecasts and historical trending. If we conclude that
our prospects for the realization of our deferred tax assets are more likely than not, we will then reduce our valuation allowance as appropriate and
credit income tax expense after considering the following factors:
•The level of historical taxable income and projections for future taxable income over periods in which the deferred tax assets would
be deductible, and
•Accumulation of net income before tax utilizing a look-back period of three years.
As of January 1, 2008, net operating loss carryforwards of $148.8 million were available to be utilized against future taxable income for years
through fiscal 2026, subject to annual limitations. As a result of prior ownership changes, approximately $102.2 million of our NOL carryforwards
are subject to an annual usage limitation of $4.7 million. The occurrence of an additional ownership change would limit our ability to utilize the
approximately $46.6 million of our NOLs that are not currently subject to limitation, and could further limit our ability to utilize our remaining
NOLs and possibly other tax attributes.
On January 3, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48").
Previously, we accounted for tax contingencies in accordance
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EINSTEIN NOAH RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
17. INCOME TAXES (Continued)
with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As Required by FIN 48, which clarifies SFAS No. 109, we
recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption
date, we applied FIN 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of FIN 48, we
recorded a reduction of approximately $1.8 million of the gross deferred tax asset and a corresponding reduction of the valuation allowance. There
was no net effect to the financial statements and none of the unrecognized tax benefits will impact our effective tax rate.
The income tax uncertainties relate to periods in which net operating losses were generated. Upon adoption of FIN 48, the net operating loss
carryforwards were reduced and thus no tax liability was recorded. Additionally, we maintain a full valuation allowance against our net deferred
tax assets. Therefore, our valuation allowance was correspondingly reduced by $1.8 million. Due to the completion and the filing of Forms 3115,
Application for Change in Accounting Method, it is highly certain that approximately $1.5 million of the unrecognized tax benefits will be
realized. Additionally, we have refined our estimate of the unrecognized tax benefits related to the remaining $0.3 million. Accordingly, in the
fourth quarter of 2007, we recorded an increase of approximately $1.8 million in our gross deferred tax asset and a corresponding increase in our
valuation allowance. There was no net effect to the financial statements and none of the unrecognized tax benefits impacted our effective tax rate.
We are subject to income taxes in the U.S. federal jurisdiction, and various states and local jurisdictions. Tax regulations within each
jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. We remain subject to
examination by U.S. federal, state and local tax authorities for tax years 2003 through 2006. With a few exceptions, we are no longer subject to
U.S. federal, state or local examinations by tax authorities for the tax year 2002 and prior.