Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

12. Income Taxes

“Income before provision for income taxes” as shown in the accompanying Consolidated Statements of Income is comprised of the following (in thousands):

	Year Ended December 31,
	2020		2019		2018
Domestic	$	14,930	$	44,343	$	52,798
Foreign		14,193		13,422		13,366
Total	$	29,123	$	57,765	$	66,164

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Components of the “Provision for income taxes” in the accompanying Consolidated Statements of Income consist of the following (in thousands):

	Year Ended December 31,
	2020		2019		2018
Current
Federal	$	2,265	$	2,533	$	1,393
Foreign		4,418		4,929		4,738
State and local		580		1,137		700
Total current expense		7,263		8,599		6,831
Deferred expense
Federal		1,229		2,084		8,795
Foreign		351		(142)		12
State and local		260		368		704
Total deferred expense		1,840		2,310		9,511
Provision for income taxes	$	9,103	$	10,909	$	16,342

A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2020			2019			2018
U.S. statutory tax rate		21.0	%		21.0	%		21.0	%
State and local taxes, net of federal benefit		3.1			3.1			3.1
Income attributable to non-controlling interests (a)		(9.9)			(10.0)			(10.0)
Subtotal		14.2	%		14.1	%		14.1	%
Non-creditable foreign taxes - non-controlling interest (b) (c)		5.1			2.8			2.7
Non-creditable foreign taxes - RE/MAX Holdings (c) (d)		2.1			1.1			1.2
Foreign derived intangible income deduction (c)		(3.1)			(1.5)			(1.3)
Other permanent differences		2.0			0.7			0.4
Uncertain tax positions (c)		1.9			1.0			0.8
Impact of TRA adjustment on NCI (e)		—			—			0.7
Effect of permanent difference - TRA adjustment (f)		—			—			(2.2)
Valuation allowance recognized on basis step-ups		—			—			9.5
Conversions of acquired C-Corporations to pass-through entities (g)		8.4			—			—
Other		0.7			0.7			(1.2)
		31.3	%		18.9	%		24.7	%

(a) Given virtually all our income is generated via a pass-through entity of which the non-controlling interest owns approximately 40%, that proportion of our income is not subject to U.S. or state income tax rates.

(b) Approximately 40% of foreign taxes paid at the RMCO level are attributable to the non-controlling interest. As a result, these taxes are never creditable against the U.S. taxes of Holdings.

(c) The percentage impact of all these items increased in relation to 2019 because our pre-tax net income decreased in 2020 while the underlying tax or deduction was relatively unchanged.

(d) While a portion of our foreign taxes are creditable within the U.S., most of the taxes we pay in Canada are not due largely to changes from TCJA (see discussion below).

(e) Reflects the additional impact of non-controlling interest adjustment being on a larger base of income that includes the gain on reduction in TRA liability.

(f) Reflects the impact of gain on TRA liability reduction, which is not taxable.

(g) In 2020, the Company converted wemlo and First from C Corporations to flow-through entities, which triggered taxable gains. These conversions are expected to provide long-term tax benefits, both additional amortization and avoiding double taxation on profits.

In December 2017, the Tax Cut and Jobs Act (the “TCJA”) was enacted, which included a significant reduction in the U.S. corporate income tax rate from 35% to 21% along with several changes to taxation of foreign derived income.

In 2018, the Company completed its evaluation of the impacts to its foreign derived income, particularly the tax credits received for foreign taxes and deductions allowed under the newly created foreign-derived intangible income deduction. The SEC staff issued Staff Accounting Bulletin 118 and later ASU 2018-05, which provided all companies through December of 2018 to finalize provisional estimates of the impacts of the TCJA.

Starting with tax year 2018, the Company has foreign tax credit limitation due to the U.S. federal tax rate being lower than many foreign jurisdictions, particularly Canada (reflected in the rate reconciliation table above as “Non-creditable foreign taxes - RE/MAX Holdings”). Certain of the tax basis step-ups, described in Note 4, Non-controlling interest, are related to intangible assets from the Company’s Western Canada operations. The deductions expected to be taken from these tax basis step-ups are no longer expected to be realized by the Company due to now being subject to a foreign tax credit limitation. As a result, the Company recognized a $6.3 million valuation allowance against the related deferred tax assets and an increase in “Provision for income taxes” in the accompanying Consolidated Statements of Income (reflected in the rate reconciliation table above as a 9.5% adjustment in 2018). The loss in value of the step-up, along with other less significant changes, also reduced the value of the TRA liabilities, resulting in a $6.1 million benefit to operating income. The net impact of these items was insignificant to net income.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying Consolidated Balance Sheets.

These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows (in thousands):

	As of December 31,
	2020		2019
Long-term deferred tax assets
Goodwill, other intangibles and other assets	$	40,077	$	42,800
Imputed interest deduction pursuant to tax receivable agreements		2,306		2,651
Operating lease liabilities		2,671		1,618
Compensation and benefits		3,237		3,043
Allowance for doubtful accounts		1,429		1,629
Motto contingent liability		1,034		783
Deferred revenue		3,891		3,706
Foreign tax credit carryforward		2,996		1,862
Net operating loss (a)		—		2,641
Other		817		950
Total long-term deferred tax assets		58,458		61,683
Valuation allowance (b)		(6,834)		(7,184)
Total long-term deferred tax assets, net of valuation allowance		51,624		54,499
Long-term deferred tax liabilities
Property and equipment and other long lived assets		(1,577)		(1,494)
Other		(1,682)		(703)
Total long-term deferred tax liabilities		(3,259)		(2,197)
Net long-term deferred tax assets		48,365		52,302
Total deferred tax assets and liabilities	$	48,365	$	52,302

(a) The conversion of acquired companies to LLCs resulted in the utilization of these net operating losses in 2020.

(b) Includes a valuation allowance on deferred tax assets for goodwill and intangibles in the Company’s Western Canada operations, as well as foreign tax credit carryforwards.

As of December 31, 2020, the Company had $3.0 million in unutilized foreign tax credit carryforwards. If unused, the carryforwards will begin to expire during the years 2029-2031. This amount is included in the valuation allowance as of December 31, 2020.

Net deferred tax assets are recorded related to differences between the financial reporting basis and the tax basis of Holdings’ proportionate share of the net assets of RMCO. Based on the Company’s historical taxable income and its

expected future earnings, management evaluates the uncertainty associated with booking tax benefits and determines whether the deferred tax assets are more likely than not to be realized, including evaluation of deferred tax liabilities and the expectation of future taxable income. If not expected to be realized, a valuation allowance is recognized to offset the deferred tax asset.

The Company and its subsidiaries file, or will file, income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. Holdings will file its 2020 income tax returns by October 15, 2021. RMCO is not subject to domestic federal income taxes as it is a flow-through entity; however, RMCO is still required to file an annual U.S. Return of Partnership Income. With respect to state and local jurisdictions and countries outside of the U.S., the Company and its subsidiaries are typically subject to examination for three to four years after the income tax returns have been filed. As such, income tax returns filed since 2016 are subject to examination.

Uncertain Tax Positions

The Company has recognized uncertain tax position liabilities, and related tax expense for certain foreign tax matters, along with a receivable for amounts of such foreign taxes expected to be creditable in the U.S. While the Company believes the liabilities recognized for uncertain tax positions are adequate to cover reasonably expected tax risks, there can be no assurance that an issue raised by a tax authority will be resolved at a cost that does not exceed the liability recognized. Interest and penalties are accrued on uncertain tax positions and included in the “Provision for income taxes” in the accompanying Consolidated Statements of Income.

Uncertain tax position liabilities represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the consolidated financial statements and are recognized in “Income taxes payable” in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount, excluding interest and penalties is as follows:

	As of December 31,
	2020		2019
Balance, January 1	$	4,810	$	4,278
Increase related to prior period tax positions		490		532
Balance, December 31 (a)	$	5,300	$	4,810

(a) Excludes accrued interest and penalties of $2.3 million and $1.9 million for the years ended December 31, 2020 and 2019, respectively. These related interest and penalties are recognized in “Income taxes payable” within the Consolidated Balance Sheets.

The Company’s uncertain tax positions have a reasonable possibility of being settled within the next 12 months.