INCOME TAXES

Effective March 1, 2018, the Company elected to be treated as a corporation for U.S. federal income tax purposes, while remaining a limited partnership under state law. A portion of the Company’s operations was and continues to be held through AHI and corporate subsidiaries of Ares Investments. AHI and such corporate subsidiaries are U.S. corporations and subject to U.S. corporate tax on earnings that flow through from subsidiary entities. The income of such corporations has historically been subject to U.S. federal, state and local income taxes, and certain of its foreign subsidiaries continue to be subject to foreign income taxes (for which a foreign tax credit can generally offset U.S. corporate taxes imposed on the same income). Prior to March 1, 2018, a substantial portion of the Company’s earnings flowed through to owners of the Company without being subject to entity level income taxes. Consequently, a significant portion of the Company’s earnings did not reflect a provision for income taxes except those for foreign, state, city and local income taxes incurred at the entity level. From March 1, 2018, this portion of the Company’s earnings was subject to U.S. corporate tax.

The Company’s income tax provision includes corporate income taxes and other entity level income taxes, as well as income taxes incurred by certain affiliated funds that are consolidated in these financial statements. The Company had an income tax benefit of $12.4 million for the three months ended March 31, 2018. The net income tax benefit recorded for the three months ended March 31, 2018 includes a tax expense related to a deferred tax liability established for the anticipated future tax consequences of performance income and appreciation on certain investments that were previously exempt for tax purposes; however this tax expense was offset by a tax benefit related to a deferred tax asset established for certain equity based accounting adjustments. For the three months ended March 31, 2017, the Company had an income tax benefit of $34.3 million primarily driven by the one-time ARCC-ACAS transaction support payment.

Supplemental information on an unaudited pro forma basis, as if the Company's election to be treated as a corporation for U.S. federal income tax purposes was effective for the three months ended March 31, 2017 is as follows:




	Three Months Ended March 31,
							2017
	2018			2017			Pro forma
Provision for Income Taxes - The Company
Income tax benefit of the Company	$	(12,375	)	$	(34,733	)	$	(28,344	)

Provision for Income Taxes - Consolidated Funds
Income tax expense of the Consolidated Funds	—			469			469
Total Provision for Income Taxes	$	(12,375	)	$	(34,264	)	$	(27,875	)

The 2017 pro forma tax information was calculated as if the Company's election to be treated as a corporation for U.S. federal income tax purposes was effective for the three months ended March 31, 2017.

The Company’s effective income tax rate is dependent on many factors, including the estimated nature of many amounts and the mix of revenues and expenses between U.S. corporate entities that are subject to income taxes and those subsidiaries that are not. For the three months ended March 31, 2018 and 2017, the Company has utilized the discrete effective tax rate method to calculate its interim income tax provision. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. Additionally, the Company’s effective tax rate is influenced by the amount of income tax provision recorded for any affiliated funds that are consolidated in these financial statements. Consequently, the effective income tax rate is subject to significant variation from period to period.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local and foreign tax regulators. As of March 31, 2018, the Company’s U.S. federal income tax returns for the years 2014 through 2018 are open under the normal statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2014 to 2018. Foreign tax returns are generally subject to audit from 2013 to 2018. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s condensed consolidated financial statements.