First Watch Restaurant Group, Inc.FWRG
First Watch Restaurant Group, Inc. Income Taxes Disclosure
Income Taxes
Income before taxes were as follows:
| FISCAL YEAR | ||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | |||||||||||
| U.S. income before tax | $ | 12,133 | $ | 28,026 | $ | 36,075 | ||||||||
| Income before taxes | $ | 12,133 | $ | 28,026 | $ | 36,075 | ||||||||
The components of the provision for income taxes were as follows:
| FISCAL YEAR | |||||||||||||||||
| (in thousands) | 2025 | 2024 | 2023 | ||||||||||||||
| Current provision: | |||||||||||||||||
| U.S. Federal | $ | (706) | $ | (326) | $ | (217) | |||||||||||
| State | (2,026) | (1,952) | (2,158) | ||||||||||||||
| Total current provision | (2,732) | (2,278) | (2,375) | ||||||||||||||
| Deferred benefit (provision): | |||||||||||||||||
| U.S. Federal | 9,846 | (7,031) | (8,896) | ||||||||||||||
| State | 185 | 208 | 581 | ||||||||||||||
| Total deferred benefit (provision) | 10,031 | (6,823) | (8,315) | ||||||||||||||
| Income tax benefit (expense) | $ | 7,299 | $ | (9,101) | $ | (10,690) | |||||||||||
A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory income tax rate to income before income taxes after the adoption of ASU 2023-09 is as follows:
| FISCAL YEAR | ||||||||
| 2025 | ||||||||
| U.S. Federal statutory rate | $ | 2,548 | 21.0 | % | ||||
| State and local income taxes, net of federal income tax effect (a) | 1,415 | 11.7 | % | |||||
| Tax credits | ||||||||
| FICA tip credit | (12,561) | (103.5) | % | |||||
| Change in valuation allowance | (3,147) | (25.9) | % | |||||
| Nontaxable or nondeductible items | ||||||||
| FICA tip expenses | 2,638 | 21.7 | % | |||||
| Stock-based compensation | 1,278 | 10.5 | % | |||||
| Secondary offerings - costs | 291 | 2.4 | % | |||||
| Meals | 130 | 1.0 | % | |||||
| Other nondeductible items | 75 | 0.6 | % | |||||
| Other adjustments | 34 | 0.3 | % | |||||
| Effective tax rate | $ | (7,299) | (60.2) | % | ||||
_____________
(a) State taxes in Florida, Texas and Missouri make up the majority (greater than 50 percent) of the tax effect of this category
The effective income tax rate for Fiscal 2025 differed from the federal statutory rate primarily due to (i) the benefit of the tax credits for FICA taxes on certain employee tips, (ii) the change in valuation allowance, (iii) state taxes and (iv) impacts of executive stock-based compensation.
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate before the adoption of ASU 2023-09 is as follows:
| FISCAL YEAR | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Income taxes at federal statutory rate | 21.0 | % | 21.0 | % | ||||||||||
| State income taxes, net of federal tax effect | 5.9 | 5.8 | ||||||||||||
| FICA tip credit | (30.3) | (19.9) | ||||||||||||
| Other tax credits | (0.2) | — | ||||||||||||
| Valuation allowance for federal and state | 34.1 | 17.6 | ||||||||||||
| Stock-based compensation | 1.8 | 3.4 | ||||||||||||
| Secondary offerings - costs | 1.0 | 0.6 | ||||||||||||
| Other permanent items | 0.4 | 0.5 | ||||||||||||
| Rate change | (0.5) | 0.6 | ||||||||||||
| Other | (0.7) | — | ||||||||||||
| Total | 32.5 | % | 29.6 | % | ||||||||||
The effective income tax rate for Fiscal year 2024 and Fiscal year 2023 differed from the blended federal and state statutory rate primarily due to (i) the change in the valuation allowance, (ii) the benefit of the tax credits for FICA taxes on certain employee tips, (iii) impacts of executive stock-based compensation and (iv) non-deductible costs associated with the secondary offerings.
The components of deferred tax assets and liabilities were as follows:
| (in thousands) | DECEMBER 28, 2025 | DECEMBER 29, 2024 | ||||||||||||
| Deferred income tax assets | ||||||||||||||
| FICA tip credit | $ | 70,094 | $ | 59,671 | ||||||||||
| State tax credits | 51 | 48 | ||||||||||||
| Net operating loss | 5,504 | 17,462 | ||||||||||||
| Operating lease liabilities | 183,635 | 155,540 | ||||||||||||
| Organizational costs | 437 | 520 | ||||||||||||
| Interest limitation | 159 | 416 | ||||||||||||
| Accrued compensation | 3,634 | 2,781 | ||||||||||||
| Deferred revenues | 384 | 492 | ||||||||||||
| Stock-based compensation | 3,807 | 3,512 | ||||||||||||
| Research expenses | 50 | 590 | ||||||||||||
| Interest rate swaps | 361 | 146 | ||||||||||||
| Other | 2,221 | 1,748 | ||||||||||||
| Valuation allowance | (54,365) | (57,664) | ||||||||||||
| Total deferred income tax assets | 215,972 | 185,262 | ||||||||||||
| Deferred income tax liabilities | ||||||||||||||
| Operating lease right-of-use assets | (154,405) | (132,054) | ||||||||||||
| Depreciation | (46,249) | (48,303) | ||||||||||||
| Intangible assets | (37,290) | (37,123) | ||||||||||||
| Total deferred income tax liabilities | (237,944) | (217,480) | ||||||||||||
| Net deferred income tax liabilities | $ | (21,972) | $ | (32,218) | ||||||||||
Tax Carryforwards
The amount and expiration dates of tax carryforwards as of December 28, 2025 are as follows:
| (in thousands) | EXPIRATION DATE | AMOUNT | |||||||||
| Federal net operating loss carryforwards | Indefinite | $ | 23,602 | ||||||||
| General business tax credits (carried forward 20 years) | 2031 - 2045 | $ | 70,264 | ||||||||
The Company also has state net operating loss carryforwards of $11.9 million.
In the U.S., a restaurant company employer may claim a credit against its federal income taxes for FICA taxes paid on certain tipped wages (“FICA tip credit”).
During the first quarter of 2024, the Company’s former majority shareholder sold shares, through a secondary offering. The sale resulted in a change in control event, per the terms of the agreement with previous stockholders, and the contingent liability was reevaluated and final payment to previous stockholders was made in the second quarter of 2024.
Section 382 of the Internal Revenue Code (“IRC § 382”) limits a company’s ability to utilize tax attribute carryforwards in the event of an “ownership change”, which is defined as a change in ownership of more than 50% of a company’s stock within a rolling three-year period. We have considered the impact of potential ownership changes to our ability to realize the benefit of our deferred tax assets and do not believe that any resulting limitation will have a material impact.
Valuation Allowance
As a result of Management’s annual assessment, for the fiscal year ended on December 28, 2025, there was a net decrease to the valuation allowance on federal tax credit carryforwards. Management’s assessment of the valuation allowance considered all available positive and negative evidence, including the scheduled reversal of temporary differences, cumulative income position, recent and projected future taxable income, and prudent and feasible tax planning strategies.
Changes in the deferred tax asset valuation allowance were as follows:
| (in thousands) | |||||
| Balance as of December 25, 2022 | $ | (41,754) | |||
| Increase | (6,357) | ||||
| Balance as of December 31, 2023 | (48,111) | ||||
| Increase | (9,553) | ||||
| Balance as of December 29, 2024 | (57,664) | ||||
| Decrease | 3,299 | ||||
| Balance as of December 28, 2025 | $ | (54,365) | |||
The Company is subject to examination by federal, state and local jurisdictions, where applicable. As of December 28, 2025, the tax years that remain subject to examination by major tax jurisdictions under the statute of limitations are from the year 2017 and forward.
Disclosure of Income Taxes Paid
Income taxes paid by jurisdiction are as follows:
| FISCAL YEAR | |||||
| (in thousands) | 2025 | ||||
| U.S. Federal | $ | 597 | |||
| Florida | 707 | ||||
| Texas | 230 | ||||
| All other states | 1,028 | ||||
| Total taxes paid | $ | 2,562 | |||
Enactment of H.R. 1
On July 4, 2025, H.R. 1 - the One Big Beautiful Bill Act (“the Bill”) was enacted in the U.S. The Bill includes a broad range of tax reform provisions, including extending and modifying certain key Tax Cuts and Jobs Act provisions and provisions allowing accelerated tax deductions for qualified property and research expenditures. The Bill has multiple effective dates, with certain provisions effective in 2025 and others to be implemented through 2027. The Bill’s enactment did not materially impact our effective income tax rate or cash tax position for the year ended December 28, 2025.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 24, 2026 | Showing above |
| 2024 | Mar 11, 2025 | |
| 2023 | Mar 5, 2024 | |
| 2022 | Mar 7, 2023 | |
| 2021 | Mar 23, 2022 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.