Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Federated Hermes files a consolidated federal income tax return. Financial statement tax expense is determined under the liability method.

Income Tax Provision consisted of the following expense/(benefit) components for the years ended December 31: 

(in thousands)	2023		2022		2021
Current:
Federal	$	91,194	$	77,954	$	73,351
State	11,645		11,946		9,498
Foreign	(540)		580		2,970
Total Current	102,299		90,480		85,819
Deferred:
Federal	3,686		(1,589)		3,457
State	(185)		(360)		551
Foreign	751		(16,873)		14,155
Total Deferred	4,252		(18,822)		18,163
Total	$	106,551	$	71,658	$	103,982

The reconciliation between the statutory income tax rate and the effective tax rate consisted of the following for the years ended December 31: 

	2023		2022		2021
Expected Federal Statutory Income Tax Rate	21.0	%	21.0	%	21.0	%
Increase/(Decrease):
State and Local Income Taxes, net of Federal Benefit	2.4		2.9		1.9
Foreign Income Taxes	2.0		(1.8)		3.6
Non-Deductible Executive Compensation	1.0		1.2		1.2
Other	(0.5)		0.1		(0.1)
Effective Tax Rate	25.9	%	23.4	%	27.6	%

The effective tax rate for 2023 increased to 25.9% as compared to the effective tax rate for 2022 of 23.4% primarily due to a valuation allowance on foreign deferred tax assets (1.0%), nondeductible expenses associated with the restructuring of an infrastructure fund (0.9%) and establishing a deferred tax asset in 2022 related to a write-off of a foreign subsidiary (0.8%).

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities consisted of the following at December 31:

(in thousands)	2023		2022
Deferred Tax Assets
Tax Net Operating Loss Carryforwards	$	72,886	$	69,634
Lease Liability	26,652		25,630
Compensation and Related	16,719		18,267
Other	2,647		5,619
Total Deferred Tax Assets	118,904		119,150
Valuation Allowance	(53,420)		(52,432)
Total Deferred Tax Asset, net of Valuation Allowance	$	65,484	$	66,718
Deferred Tax Liabilities
Intangible Assets	$	216,093	$	211,340
Right-of-Use Asset	24,589		23,201
Other	11,094		12,587
Total Gross Deferred Tax Liability	$	251,776	$	247,128
Net Deferred Tax Liability	$	186,292	$	180,410

At December 31, 2023, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $72.9 million. The state net operating losses will expire through 2043, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $40.8 million (or 99.8%) of the deferred tax asset for state tax net operating losses, and for $12.6 million (or 39.5%) of the deferred tax asset for foreign tax net operating losses. The valuation allowances were recorded due to management’s belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses. For the deferred tax asset, net of valuation allowance related to foreign net operating losses, management has relied on future reversals of temporary taxable differences to support the realizable portion of the deferred tax asset.

At December 31, 2022, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of $69.6 million. The state net operating losses will expire through 2042, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $43.7 million (or 99.6%) of the deferred tax asset for state tax net operating losses, and for $8.7 million (or 33.9%) of the deferred tax asset for foreign tax net operating losses. The valuation allowances were recorded due to management’s belief that it is more likely than not that Federated Hermes will not realize the full benefit of these net operating losses. For the deferred tax asset, net of valuation allowance related to foreign net operating losses, management believes that it is more likely than not that it will realize the benefit of these net operating losses based on projections of future taxable income for the entities to which these relate.

Federated Hermes’ remaining deferred tax assets as of December 31, 2023 and 2022 primarily related to lease liabilities reported pursuant to ASC 842 and U.S. compensation-related expenses that have been recognized for book purposes but are not yet deductible for tax purposes. Management believes that it is more likely than not that Federated Hermes will receive the full benefit of these deferred tax assets due to the expectation that Federated Hermes will generate taxable income well in excess of these amounts in the years they become deductible.

Federated Hermes and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in certain foreign jurisdictions. Based upon its review of these filings, there were no material unrecognized tax benefits as of December 31, 2023 or 2022. Therefore, there were no material changes during 2023, and no reasonable possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months. Federated Hermes’ U.S. federal tax returns for tax years 2020 to 2023 remain open to examination, while filings in its major state tax jurisdictions from tax years 2019 to 2023 generally remain open to examination.