El Pollo Loco 2015 Annual Report Download - page 52

Table of Contents
At December 25, 2013, we maintained a full valuation allowance against our deferred tax assets. After evaluating all of the positive and negative
evidence, including our continued income from operations, reduction in interest expense resulting from the 2014 and 2013 refinancing of debt
and from our completed IPO and the resultant repayment of the 2013 Second Lien Term Loan, we concluded that it was more likely than not that
our deferred tax assets would be recovered. As a result, in fiscal 2014, we released our valuation allowance totaling approximately $65 million.
We had previously maintained a full valuation allowance on our deferred tax assets, as we had been experiencing continuing taxable losses, and
accordingly did not recognize a benefit for NOL carryforwards or other deferred tax assets in fiscal 2013 and 2012.
We will continue to reevaluate the continued need for either a full or partial valuation allowance. Relevant factors include:
All of the factors that we consider in evaluating treatment of a deferred tax asset valuation allowance involve significant judgment. For example,
there are many different interpretations of “cumulative losses in recent years” that can be used. Also, significant judgment is involved in making
projections of future financial and taxable income, especially because our financial results are significantly dependent upon industry trends. Any
change in our valuation allowance will significantly impact our financial results in the period of that change.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position we take 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 responsible authorities. The
term “more likely than not” means a likelihood of more than 50%. Otherwise, we may not recognize any of the potential tax benefits associated
with that position. We recognize 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% likely to be realized upon its effective resolution. Unrecognized tax benefits involve our judgment regarding the
likelihood of a benefit being sustained. The final resolutions of uncertain tax positions could result in adjustments to recorded amounts and affect
our results of operations, financial position, and cash flows. However, we anticipate that any such adjustments would not materially impact our
financial statements.
On July 30, 2014, we entered into the TRA. The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize
in our taxes as a result of utilizing our net operating losses and other tax attributes attributable to preceding periods. In connection with the TRA,
we amended the 2013 First Lien Credit Agreement to permit dividend payments to us by our subsidiaries in amounts up to $11 million per fiscal
year, not to exceed $33 million in the aggregate, while the 2013 First Lien Credit Agreement was outstanding. In fiscal 2014, we incurred
charges totaling approximately $41 million relating to the present value of our total estimated TRA payments. We are permitted to make TRA
payments under the 2014 Revolver. The TRA charge of $41 million is a permanent add-back to the Company’s taxable income that resulted in
approximately $14 million of tax expense for 2014.
In addition, we applied for various tax credits that resulted in $6.7 million of additional deferred tax assets and tax benefits.
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tax
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planning strategies; and
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taxable income in prior carryback years.
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current financial performance;
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our ability to meet short
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term and long
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term financial and taxable income projections;
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the overall market environment; and
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the volatility and trends in the industry in which we operate.