Income taxes

12 Months Ended

Dec. 31, 2020

Income (loss) before the provision for income taxes as shown in the accompanying consolidated statements of operations is as follows:


	Year Ended December 31,
	2020		2019		2018
Domestic	$	(13,382)	$	171,970	$	128,861
Foreign	(1,135)		1,207		2,943
Total income (loss) before the provision for income taxes	(14,517)		173,177		131,804

The provision (benefit) for income taxes consists of the following:


	Year Ended December 31,
	2020		2019		2018
Current:
Federal	$	(6,938)	$	7,359	$	178
State	256		8,280		3,586
Foreign	156		500		945
Total current tax expense	(6,526)		16,139		4,709
Deferred:
Federal	2,769		23,289		22,757
State	4,530		(1,346)		946
Foreign	(86)		(318)		230
Total deferred tax expense	7,213		21,625		23,933
Provision for income taxes	$	687	$	37,764	$	28,642

The Company is the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and certain state and local income taxes. As a partnership, Pla-Fit Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pla-Fit Holdings is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis. Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings. The Company is also subject to taxes in certain foreign jurisdictions.

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	5.7	%	6.2	%	5.9	%
State rate change impact on deferred taxes	(37.4)	%	(4.1)	%	(3.4)	%
Federal rate change impact on deferred taxes	—	%	—	%	—	%
Tax benefit arrangement liability adjustment	8.6	%	0.7	%	0.8	%
Foreign tax rate differential	(1.0)	%	—	%	0.2	%
Withholding taxes and other	(0.3)	%	—	%	(0.3)	%

Reserve for uncertain tax position	—	%	0.1	%	(0.2)	%
Income attributable to non-controlling interests	(1.3)	%	(2.1)	%	(2.3)	%
Effective tax rate	(4.7)	%	21.8	%	21.7	%

The Company’s effective tax rate was (4.7)% for the year ended December 31, 2020, in comparison to the U.S. statutory tax rate in 2020 of 21.0%. Our effective tax rate differs from the U.S. statutory rate primarily due to the remeasurement of our deferred taxes. This remeasurement was a result of a reduction in the amount of income apportioned to various states, which resulted in the recognition of a deferred tax expense in 2020. Our effective tax rate is partially offset by a remeasurement of our liability under our tax benefit arrangements.

The Company’s effective tax rate was (4.7)% for the year ended December 31, 2020, compared to 21.8% in the prior year. The decrease in our effective income tax rate is primarily due to an income tax expense recorded in 2020 as a result of the remeasurement of its deferred taxes, partially offset by the impact of the remeasurement of the tax benefit arrangements, which is not deductible.

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:


	Year Ended December 31,
	2020		2019
Deferred tax assets:

Deferred revenue	$	5,829	$	5,343
Goodwill and intangible assets	479,627		410,585
Net operating loss	34,580		—
Right-of-use assets	46,061		38,675
Other	3,295		2,178
Deferred tax assets	$	569,392	$	456,781
Deferred tax liabilities:
Prepaid expenses	(2,591)		(1,021)
Property and equipment	(16,429)		(10,363)
Lease liabilities	(40,053)		(34,220)
Total deferred tax liabilities	$	(59,073)	$	(45,604)
Total deferred tax assets and liabilities	$	510,319	$	411,177
Reported as:
Deferred income taxes - non-current assets	$	511,200	$	412,293
Deferred income taxes - non-current liabilities	(881)		(1,116)
Total deferred tax assets and liabilities	$	510,319	$	411,177

As of December 31, 2020, we had a net deferred tax asset of $510.3 million. This amount includes gross deferred tax assets of $511.2 million, primarily resulting from tax attributes generated from past exchanges and sales of Holdings Units which will reduce taxable income in future periods. Deferred tax assets are deemed to be more likely than not to be realized. In assessing the need for a valuation allowance, we consider, among other things, projections of future taxable income and ongoing prudent and feasible tax planning strategies. As of December 31, 2020, the Company is not providing a valuation allowance against its deferred tax assets.

As of December 31, 2020, the Company had federal net operating loss carryforwards of $141,200, with an indefinite lived carryforward.

A summary of the changes in the Company’s unrecognized tax positions is as follows:


	Year Ended December 31,
	2020		2019
Balance at beginning of year	$	420	$	300
Increase related to current year tax positions	—		405
Decrease related to prior year tax positions	—		(285)
Balance at end of year	$	420	$	420

As of December 31, 2020 and 2019, the total liability related to uncertain tax positions was $420, and is included within other liabilities on our consolidated balance sheets. The table above presents a reconciliation of the beginning and ending balances of the liability for unrecognized tax benefits, excluding interest and penalties, for the years ended December 31, 2020 and 2019. During 2019, the company recognized a net impact of $120 to its liability for unrecognized tax benefits. During 2018, the Company settled a tax examination for $2,625 which was fully indemnified. At the date of settlement the Company had recorded on its balance sheet an unrecognized tax benefit and related indemnification asset of $2,967, reflecting principal and interest, and released $342 as an offset to provision for income taxes and also released an indemnification asset of $342 through other expense. The Company recognized interest and penalties related to uncertain tax positions as a component of income tax expense.

The Company and its subsidiaries file U.S. federal income tax returns, as well as tax returns in various state and foreign jurisdictions. Generally, the tax years 2017 through 2020 remain open to examination by the tax authorities in these jurisdictions.

Tax benefit arrangements

The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to the TRA Holders 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to the Direct TSG Investors 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings. The Company recorded other income of $5,949, other expense of $5,966 and other expense of $4,765 in the years ended December 31, 2020, 2019 and 2018, respectively, reflecting a change in the tax benefit obligation attributable to a change in the expected tax benefits. In 2020, 2019 and 2018, the remeasurement was primarily due to various state tax legislation changes enacted in the year as well as acquisitions which resulted in an increase in the amount of income apportioned to various states in future periods and accordingly resulted in a decrease to the tax benefit arrangement liability.

In connection with the exchanges that occurred in the secondary offerings and other exchanges during 2020 and 2019, 4,839,866 and 885,810 Holdings Units, respectively, were redeemed by the Continuing LLC Owners for newly-issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of Pla-Fit Holdings subject to the provisions of the tax receivable agreements. As a result of the change in Planet Fitness, Inc.’s ownership percentage of Pla-Fit Holdings that occurred in conjunction with the exchanges, we recorded a decrease to our net deferred tax assets of $3,490 and $190, during the years ended December 31, 2020 and 2019, respectively. As a result of these exchanges, during the years ended December 31, 2020 and 2019 we also recognized deferred tax assets in the amount of $109,823 and $20,362, respectively, and corresponding tax benefit arrangement liabilities of $93,554 and $17,016, respectively, representing approximately 85% of the tax benefits due to the TRA Holders. The offset to the entries recorded in connection with exchanges in each year was to stockholders’ equity.

The tax benefit obligation was $488,200 and $427,216 as of December 31, 2020 and 2019, respectively.

Projected future payments under the tax benefit arrangements are as follows:


	Amount
2021	$	—
2022	9,742
2023	32,359
2024	38,296
2025	47,385
Thereafter	360,418
Total	$	488,200