INCOME TAXES
Income taxes consist of the following in each fiscal year (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2025 | | 2024 | | 2023 |
| Current: | | | | | | |
| Federal | | $ | 25,760 | | | $ | 32,251 | | | $ | 53,229 | |
| State | | 9,839 | | | 10,933 | | | 17,274 | |
| | 35,599 | | | 43,184 | | | 70,503 | |
| Deferred: | | | | | | |
| Federal | | (42,744) | | | (2,696) | | | (10,642) | |
| State | | (14,961) | | | (8,116) | | | (1,347) | |
| | (57,705) | | | (10,812) | | | (11,989) | |
| Income tax (benefit) expense from continuing operations | | $ | (22,106) | | | $ | 32,372 | | | $ | 58,514 | |
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The expense (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory rate to pre-tax income (loss). The sources and tax effects of the differences are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2025 | | 2024 | | 2023 |
| Pre-tax (loss) income | | $ | (102,825) | | | | $ | (4,323) | | | | $ | 189,340 | | |
| | | | | | | | | |
| Income tax at federal statutory rate | | (21,593) | | 21.0 | % | | (908) | | 21.0 | % | | 39,821 | | 21.0 | % |
| State income taxes, net of federal benefit | | (5,450) | | 5.3 | % | | (233) | | 5.4 | % | | 10,587 | | 5.6 | % |
| Stock-based compensation expense | | 1,568 | | (1.5) | % | | 51 | | (1.2) | % | | 71 | | — | % |
| Tax credits, net of valuation allowance | | (334) | | 0.3 | % | | (340) | | 7.9 | % | | (818) | | (0.4) | % |
| Nondeductible goodwill related to impairment | | 6,602 | | (6.4) | % | | 35,075 | | (811.5) | % | | — | | — | % |
| Nondeductible goodwill related to the sale of company-operated restaurants | | 120 | | (0.1) | % | | 1,787 | | (41.3) | % | | 9,280 | | 4.9 | % |
| State audit accrual | | (747) | | 0.7 | % | | — | | — | % | | — | | — | % |
| Benefit related to COLIs | | (2,271) | | 2.2 | % | | (4,703) | | 108.8 | % | | (1,947) | | (1.0) | % |
| Officers’ compensation limitation | | (333) | | 0.3 | % | | 1,306 | | (30.2) | % | | 1,188 | | 0.6 | % |
| Other, net | | 332 | | (0.3) | % | | 337 | | (7.8) | % | | 332 | | 0.2 | % |
| Effective tax rate | | $ | (22,106) | | 21.5 | % | | 32,372 | | (748.9) | % | | 58,514 | | 30.9 | % |
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at each fiscal year-end are presented below (in thousands):
| | | | | | | | | | | |
| 2025 | | 2024 |
| Deferred tax assets: | | | |
| Operating and finance lease liabilities | $ | 372,538 | | | $ | 381,522 | |
| Deferred income | 22,974 | | | 15,465 | |
| Accrued defined benefit pension and postretirement benefits | 19,096 | | | 22,074 | |
| Accrued insurance | 7,145 | | | 7,135 | |
| Share-based compensation | 5,869 | | | 6,814 | |
| Deferred interest deduction | 5,606 | | | 1,664 | |
| Accrued legal settlements | 5,377 | | | 4,764 | |
| Property and equipment, net of impairment | 4,107 | | | 5,847 | |
| Accrued incentive compensation | 1,921 | | | 2,692 | |
| Other reserves and allowances | 1,778 | | | 1,241 | |
| Accrued compensation expense | 1,325 | | | 1,254 | |
| Capitalized research costs | 1,152 | | | 1,443 | |
| Tax loss and tax credit carryforwards | 398 | | | 387 | |
| Other, net | 2,509 | | | 2,537 | |
| Total gross deferred tax assets | 451,795 | | | 454,839 | |
| Valuation allowance | — | | | — | |
| Total net deferred tax assets | 451,795 | | | 454,839 | |
| Deferred tax liabilities: | | | |
| Operating and finance lease ROU assets | (367,274) | | | (378,531) | |
| Intangible assets | (41,128) | | | (88,378) | |
| | | |
| | | |
| Other | (2,125) | | | (1,542) | |
| Total gross deferred tax liabilities | (410,527) | | | (468,451) | |
| Net deferred tax assets (liabilities) | $ | 41,268 | | | $ | (13,612) | |
Deferred tax assets as of September 28, 2025 include state gross net operating loss carryforwards of approximately $10.6 million, of which $8.6 million has an indefinite carryforward. The remainder will expire at various times between 2026 and 2042. The Company believes it is more likely than not that all deferred tax assets will be realized through future taxable income or alternative tax strategies.
The major jurisdictions in which the Company files income tax returns includes the United States and states in which we operate that impose an income tax. The federal statutes of limitations have not expired for fiscal year 2022 and forward. The statutes of limitations for California, which constitutes the Company's major state tax jurisdiction, have not expired for fiscal years 2021 and forward.
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.