Income Taxes

12 Months Ended

Dec. 31, 2019

Income before income taxes and noncontrolling interest is as follows for the years ended December 31, 2019, 2018 and 2017:



	For the Year Ended December 31,
	2019			2018		2017
(in thousands)
U.S. operations	$	(103,080	)	$	659,937	$	70,484
Non-U.S. operations	(12,902		)	36,426		42,680
	$	(115,982	)	$	696,363	$	113,164

The provision for income taxes consists of the following for the years ended December 31, 2019, 2018 and 2017:



	For the Year Ended December 31,
(in thousands)	2019			2018			2017
Current provision (benefit)
Federal	$	(1,861	)	$	49,047		$	(9,991	)
State and Local	4,362			18,697			65
Foreign	3,675			4,276			1,219
Deferred provision (benefit)
Federal	(13,422		)	4,986			106,415
State and Local	(1,455		)	(1,599		)	(3,380		)
Foreign	(3,576		)	764			(62		)
Provision for income taxes	$	(12,277	)	$	76,171		$	94,266

The reconciliation of the tax provision at the U.S. Federal Statutory Rate to the provision for income taxes for the

years ended December 31, 2019, 2018 and 2017:



	For the Year Ended December 31,
	2019		2018		2017
(in thousands, except percentages)
Tax provision at the U.S. federal statutory rate	21.0	%	21.0	%	35.0	%
Less: rate attributable to noncontrolling interest	(8.1	)%	(10.2	)%	(19.1	)%
State and local taxes, net of federal benefit	2.4	%	1.9	%	(1.9	)%
Impact of 2017 Tax Act on deferred tax assets	—	%	—	%	80.1	%
Impact of 2017 Tax Act on tax receivable agreement obligation	—	%	—	%	(12.9	)%
Non-deductible expenses, net	(3.7	)%	(0.3	)%	1.9	%
Other, net	(1.0	)%	(1.5	)%	0.2	%
Effective tax rate	10.6	%	10.9	%	83.3	%

The components of the deferred tax assets and liabilities as of December 31, 2019, and 2018 are as follows:



	December 31,
(in thousands)	2019			2018
Deferred income tax assets
Tax Receivable Agreement	$	197,598		$	167,117
Share-based compensation	15,572			9,419
Intangibles	2,467			12,738
Fixed assets and other	44,908			21,088
Tax credits and net operating loss carryforwards	86,420			44,972
Less: Valuation allowance on net operating loss carryforwards and tax credits	(60,594		)	(44,947		)
Total deferred income tax assets	$	286,371		$	210,387

Deferred income tax liabilities
Intangibles	71,700			10,028
Total deferred income tax liabilities	$	71,700		$	10,028

The Company is subject to U.S. federal, state and local income tax at the rate applicable to corporations less the rate attributable to the noncontrolling interest in Virtu Financial. These noncontrolling interests are subject to U.S. taxation as partnerships. Accordingly, for the years ended December 31, 2019, 2018 and 2017 the income attributable to these noncontrolling interests is reported in the Consolidated Statements of Comprehensive Income, but the related U.S. income tax expense attributable to these noncontrolling interests is not reported by the Company as it is the obligation of the individual partners. Income tax expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the Company’s subsidiaries are subject to corporate taxation.

Included in Other assets on the Consolidated Statements of Financial Condition at December 31, 2019 and December 31, 2018 are current income tax receivables of $39.3 million and $41.1 million, respectively. The balances at December 31, 2019 and December 31, 2018 primarily comprise income tax benefits due to the Company from federal, state and local, and foreign tax jurisdictions based on income before taxes. Included in Accounts payable, accrued expenses and other liabilities on the Consolidated Statements of Financial Condition at December 31, 2019 and December 31, 2018 are current tax liabilities of $11.5 million and $10.0 million, respectively. The balances at December 31, 2019 and December 31, 2018 primarily comprise income taxes owed to federal, state and local, and foreign tax jurisdictions based on income before taxes.

Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in connection with the IPO (see Note 6 “Tax Receivable Agreements”), the Acquisition of KCG and the ITG Acquisition (see Note 3 “ITG Acquisition”), differences in the valuation of financial assets and liabilities, and other temporary differences arising from the deductibility of compensation, depreciation, and other expenses in different time periods for book and income tax return purposes.

There are no expiration dates on the deferred tax assets. The provisions of ASC 740 require that carrying amounts of deferred tax assets be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the

realization of the deferred tax assets. At December 31, 2019, the Company had U.S. federal net operating loss carryforwards of $91.3 million. The Company recorded a deferred tax asset related to these federal net operating carryforwards of $19.2 million. The Company did not record a valuation allowance against this deferred tax asset. At December 31, 2019, the Company recorded deferred income taxes related to state and local net operating losses of $3.7 million. These net operating losses will begin to expire in 2031. The Company did not record a valuation allowance against this deferred tax asset.

As a result of the ITG Acquisition, the Company has non-U.S. net operating losses at December 31, 2019 of $86.3 million and has recorded a related deferred tax asset of $17.9 million. A valuation allowance of $15.6 million was recorded against this deferred tax asset at December 31, 2019 as it is more likely than not that a portion of this deferred tax asset will not be realized. As a result of the Acquisition of KCG, the Company has non-U.S. net operating losses at December 31, 2019 and December 31, 2018 of $239.0 million and $239.3 million, respectively, and has recorded a related deferred tax asset of $44.9 million and $44.9 million, respectively. A full valuation allowance was also recorded against this deferred tax asset at December 31, 2019 and December 31, 2018 as it is more likely than not that this deferred tax asset will not be realized. No valuation allowance against the remaining deferred taxes was recorded as of December 31, 2019 and December 31, 2018 because it is more likely than not that these deferred tax assets will be fully realized.

The Company is subject to taxation in U.S. federal, state, local and foreign jurisdictions. As of December 31, 2019, the Company’s tax years for 2013 through 2018 and 2010 through 2018 are subject to examination by U.S. and non-U.S. tax authorities, respectively. As a result of the ITG Acquisition and the Acquisition of KCG, the Company has assumed any ITG and KCG tax exposures. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2013 through 2018. The final outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments to the unrecognized tax benefits, if any, will not result in a material change to the financial condition, results of operations and cash flows.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income or loss before income taxes and noncontrolling interest. Penalties, if any, are recorded in Operations and administrative expense and interest received or paid is recorded in Other, net or Operations and administrative expense in the Consolidated Statement of Comprehensive Income.

The Company had $8.8 million of unrecognized tax benefits as of December 31, 2019, all of which would affect the Company’s effective tax rate if recognized. The Company has determined that there are no uncertain tax positions that would have a material impact on the Company’s financial position as of December 31, 2019.

The table below presents the changes in the liability for unrecognized tax benefits. This liability is included in Accounts payable and accrued expenses and other liabilities on the Consolidated Statement of Financial Condition.



(in thousands)
Balance at December 31, 2016	$	—
Increase from Acquisition of KCG	7,232
Decreases based on tax positions related to prior period	—
Increase based on tax positions related to current period	68
Balance at December 31, 2017	7,300
Decreases based on tax positions related to prior period	(840		)
Increase based on tax positions related to current period	868
Balance at December 31, 2018	7,328
Increase from ITG Acquisition	2,713
Decreases based on tax positions related to prior period	(1,263		)
Increase based on tax positions related to current period	—
Balance at December 31, 2019	$	8,778