The Cheesecake Factory Case Part 1 You are an advisor to The Cheesecake Factory. It is late December 2017, and you are dining with their executive team at one of their restaurants, celebrating a successful year. As you take another bite of delicious cheesecake, their CFO asks you for your thoughts on the recently enacted corporate tax legislation. The CFO is referring to the Tax Cuts and Jobs Act (TCJA), which youve heard is a major tax overhaul. While you are not a tax specialist, you quickly recall some key changes from the TCJA and apply principles you learned from the Taxes and Business Strategy course you took a few years earlier.

The key tax changes you recall are:

1. The corporate tax rate will go from 35% to 21%.

2. Tax depreciation will become much more favorable, with a lot of capital expenditures (i.e., purchases of equipment but not real estate) becoming eligible for immediate expensing for tax purposes.

3. The net operating loss rules will change from a 2-year carryback period to no carrybacks, and from a 20-year carryforward period to no limit on the carryforward period.

4. The effective date will be January 1, 2018. You know the company expects to be profitable in 2018, with sales and expenses growing at roughly the same pace as the past couple years. Having spent a lot of time with their financials, you have a basic recollection of the following:

You begin to formulate your response. You recall from your Taxes and Business Strategy course that one of the four kinds of income tax planning is shifting income over time from a high tax rate year to a low tax rate year.

1. Is there any incentive for The Cheesecake Factory in 2017 to shift income? If so, what is the incentive?

2. How might The Cheesecake Factory shift income or expenses? Be as specific as possible.

3. What are tax benefits of the income shifting you consider?

4. What are the tax and nontax costs of the income shifting you consider?

Part 2

It is spring of 2020. Having successfully advised The Cheesecake Factory for the past several years, you are an even more trusted advisor than you were back in 2017. Unfortunately, 2020 is shaping up to be a particularly bad year for the world as the pandemic spreads. In a video meeting with the executive team, they again look to you for advice and direction. Sales are down dramatically. You must decide how to navigate the crisis, not knowing how severe it will be or how long it will last. The CFO asks you directly if there are other provisions in the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) that can help the company.

In a previous meeting, you explained how the Employee Retention Credit (enacted as part of CARES) can help offset the costs of keeping the restaurant management teams on payroll despite the reduction in sales volume. In this meeting, you focus on the CARES act changes to the net operating loss rules. Specifically, you have learned that the CARES act temporarily changes the net operating loss rules to allow for net operating losses from 2018, 2019, or 2020 to be carried back up to 5 years, such that companies can get refunds of taxes paid in those years. A tax refund would provide the company with a vital cash infusion at a time when the company needs cash to pay the bills and make up for the loss of sales volume. While economic prospects for 2021 are highly uncertain in spring of 2020, you are by nature optimistic and believe that the world will adapt and prevail. If you can help the company navigate through the current crisis, you believe the odds are favorable that the company will return to profitability in 2021.

Below are key numbers from The Cheesecake Factorys financial statements from 2015 to 2021. But remember, in spring 2020, the full-year 2020 and 2021 numbers have not yet happened and depend, in part, on what you advise the company to do.

1. Is there any incentive for The Cheesecake Factory in 2020 to shift income? If so, what is the incentive?

2. How might The Cheesecake Factory shift income or expenses? Be as specific as possible.

3. What are tax benefits of the income shifting you consider?

4. What are the tax and nontax costs of the income shifting you consider?

The amounts were $12.5 million in 2015 and $13.7 million in 2016