Will the litigation expense have any tax implications that could affect net earnings or effective tax rate?

Tax Impact of the $800k Litigation Charge

The $800 k litigation expense is recorded as an operating cost in the Q3 P&L, so it will directly depress Ark Restaurants’ pre‑tax earnings. Because the expense is ordinary and necessary to the business, it is fully deductible for U.S. federal and state income taxes. The deduction creates a modest “tax‑shield” that reduces the company’s tax‑able income, which in turn lowers the absolute tax bill for the quarter. However, the net‑earnings hit from the litigation is still sizable—EBITDA fell to $1.79 M—so the proportional reduction in the effective tax rate will be small. In practice, the $800 k expense will shave a few percentage points off the effective tax rate (e.g., a $800 k pre‑tax loss at a 25 % tax rate saves $200 k in tax), but the overall tax expense will still be higher than in prior quarters because the pre‑tax base remains positive.

Trading Implications

From a fundamentals standpoint, the litigation charge compresses margins and drags down Q3 EPS, which could pressure the stock in the near term. The tax‑shield effect is not enough to offset the earnings decline, so investors should focus on the net‑earnings drag rather than any modest tax‑rate benefit. Technically, the stock is testing the $1.20–$1.25 resistance band; a breach downward could open a short‑side move toward $1.10, while a bounce above $1.25 with volume may signal that the market is already pricing in the litigation and tax effects. Actionable tip: stay short‑biased until the company demonstrates that the litigation is resolved or that the expense is non‑recurring; watch for any forward‑looking guidance on the litigation’s resolution, which could lift the effective tax rate back toward historical levels and improve net earnings.