Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The (benefit) provision for income taxes consist of the following (in thousands):

	Years Ended December 31,
	2022		2021
Current:
Federal	$	73	$	2,539
State	(70)		307
Foreign	—		26
Total Current	3		2,872
Deferred:
Federal	(3,466)		12,848
State	(642)		3,591
Total Deferred	(4,108)		16,439
(Benefit) provision for income taxes	$	(4,105)	$	19,311

The (benefit) provision for income taxes shown above varies from the statutory federal income tax rate for those periods as follows (in thousands):

	Years Ended December 31,
	2022		2021
Tax (benefit) provision from federal statutory rate	$	(11,888)	$	5,356
Tax on income not subject to entity level federal income tax	4,085		1,074
State income taxes, net of federal tax effect	(1,639)		(817)
Change in fair value of warrant liabilities	(705)		(3,804)
Other permanent adjustments	(176)		(3,211)
Permanent adjustments - Tax Receivable Agreement	26		(36)
True-ups and other	(2,343)		(919)
Research and development credit	(250)		—
Foreign tax credit	—		63
Undistributed earnings	171		529
Canadian tax expense	—		26
Valuation allowance	8,857		21,240
Tax credits	(243)		(190)
Tax (benefit) provision	$	(4,105)	$	19,311

As a result of a Business Combination, the Company consists of DMS Inc. and its wholly-owned subsidiary, Blocker, which owns 60.9% of equity interests in DMSH. DMSH is treated as a partnership for purposes of U.S. federal and certain state and local income tax. As a U.S. partnership, generally DMSH will not be subject to corporate income taxes (except with respect to UE and Traverse, as described below). Instead, each of the ultimate partners (including DMS Inc.) are taxed on their proportionate share of DMSH taxable income.

While the Company consolidates DMSH for financial reporting purposes, the Company will only be taxed on its allocable share of earnings. The Company’s Income tax (benefit) expense is attributable to the allocable share of earnings from DMSH, a portion of activities of DMSH that are subject to Canadian income tax, and the activities of UE and Traverse, both are wholly-owned U.S. corporate subsidiaries of DMSH, which are subject to U.S. federal and state and local income taxes. The income

tax burden on the earnings allocated to the non-controlling interests is not reported by the Company in its consolidated financial statements under GAAP. As a result of the foregoing reasons, the Company’s effective tax rate is expected to differ materially from the statutory rate.

Any change in the fair value of the Private Placement Warrants, which are classified as a liability on the Company’s consolidated balance sheet at December 31, 2022, is recognized as a gain or loss in the Company’s consolidated statements of operations. The Private Placement Warrants are deemed equity instruments for income tax purposes, and accordingly, there is no change to Income tax (benefit) expense relating to changes in the fair value of such warrants.

Deferred tax assets and liabilities are composed of the following (in thousands):

	Years Ended December 31,
	2022		2021
Deferred tax assets:
Investment in DMS Holdings LLC	$	34,137	$	29,066
Reserve accruals	156		418
Charitable contributions	18		11
Interest carryforward	5,131		2,562
Tax credit carryforwards	1,013		190
Property and equipment	(7)		42
Operating lease liabilities	343		—
Net operating loss	2,863		1,808
Total gross deferred tax assets	43,654		34,097
Less: Valuation allowance	(41,829)		(32,970)
Total deferred tax assets, net	1,825		1,127
Deferred tax liabilities:
Intangibles	(1,295)		(4,561)
Operating lease right-of-use assets	(119)		—
Undistributed earnings	(1,523)		(1,352)
Total deferred tax liabilities	(2,937)		(5,913)
Net deferred tax liabilities	$	(1,112)	$	(4,786)

At December 31, 2022, the Company has federal and state net operating loss carryforwards attributable to DMS, Inc. in the amount of $10 million and $13.5 million , respectively. The federal carryforwards are not subject to expiration, and the state carryforwards begin to expire in 2030, however certain state carryforwards are indefinite.

At December 31, 2022, the Company has an expected federal and state income tax credit carryforward of $1.0 million which would expire at December 31, 2039, unless utilized. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. We do not expect any annual limitation to materially impact the utilization of net operating losses and credits.

The Company records Deferred tax assets if it is more likely than not that the Company will realize a future tax benefit. Ultimate realization of any Deferred tax assets is dependent on the Company’s ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of Deferred tax assets realizability considers many different factors including historical and projected operating results, the reversal of existing Deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. The Company establishes a valuation allowance against any Deferred tax assets for which we are unable to conclude that realizability is more likely than not.

We have determined the need for an additional $9 million valuation allowance for the period ending December 31, 2022. In doing so we assessed the available positive and negative evidence to estimate whether future taxable income would be generated to permit use of the existing Deferred tax assets (“DTAs”). A significant piece of objective negative evidence evaluated was the three-year cumulative loss before taxes. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Therefore, a valuation allowance has been recorded against the DTAs at DMS,

Inc. The amount of DTA considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present.

The Company is subject to examination by the Internal Revenue Service and taxing authorities in various states. The Company’s U.S. federal income tax returns remain subject to examination by tax authorities for the years 2018 to 2021. The Company’s state income tax returns are no longer subject to income tax examination by tax authorities prior to 2018; however, our net operating loss carryforwards arising prior to that year are subject to adjustment. The Company regularly assesses the likelihood of tax deficiencies in each of the tax jurisdictions and, accordingly, makes appropriate adjustments to the tax provision as deemed necessary.

The Company records interest and penalties, if any, as a component of its Income tax (benefit) expense in the consolidated statements of operations. No interest expense or penalties were recognized during the years ended December 31, 2022 and 2021, respectively.

Tax Receivable Agreement

Since the year ended December 31, 2021, the Company maintains a full valuation allowance on our DTA related to the Tax Receivable Agreement along with the entire DTA inventory at DMS, Inc. and Blocker, as these assets are not more likely than not to be realized based on the positive and negative evidence that we considered. The Tax Receivable Agreement liability that originated from the Business Combination is not probable under ASC 450 - Contingencies since a valuation allowance has been recorded against the related DTA. The remaining short-term Tax Receivable Agreement liability of $0.2 million is attributable to carryback claims. We will continue to evaluate the positive and negative evidence in determining the realizability of the Company’s DTAs.