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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The benefit for income taxes consists of the following (in thousands):

Years Ended December 31,
20232022
Current:
Federal$195 $73 
State(187)(70)
Total Current8 3 
Deferred:
Federal(928)(3,466)
State130 (642)
Total Deferred(798)(4,108)
Income tax benefit$(790)$(4,105)
The benefit for income taxes shown above varies from the statutory federal income tax rate for those periods as follows (in thousands):

Years Ended December 31,
20232022
Tax benefit from federal statutory rate$(25,931)$(11,888)
Tax on income not subject to entity level federal income tax6,584 4,085 
State income taxes, net of federal tax effect(4,304)(1,639)
Change in fair value of warrant liabilities(1,929)(705)
Other permanent adjustments950 26 
Permanent adjustments - goodwill impairment
4,087 — 
Permanent adjustments - Tax Receivable Agreement— (176)
Equity Conversion
(15,443)— 
True-ups and other(3,094)(2,343)
Uncertain tax position reserve
8,304 — 
Research and development credit— (250)
Undistributed earnings749 171 
Foreign rate differential
(562)— 
Valuation allowance30,113 8,857 
Tax credits(314)(243)
Tax benefit$(790)$(4,105)

As of December 31, 2023, the Company consists of DMS Inc. and its wholly-owned subsidiary, Blocker, which owns 96.6% 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 future earnings (i.e. those earnings not attributed to the non-controlling interests, which continue to be taxed on their own allocable share of future earnings of DMSH). The Company’s Income tax benefit is attributable to the allocable share of earnings from DMSH, the activities of UE and Traverse, wholly-owned U.S. corporate subsidiaries of DMSH, which is subject to U.S. federal and state and local income taxes and the activities of ClickDealer, wholly-owned foreign corporate subsidiaries of DMSH, which is subject to Netherlands, Ukraine and United Kingdom 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, the Company’s effective tax rate is expected to differ materially from the statutory rate.

For years ended December 31, 2023 and 2022, the components of Net loss before income taxes are comprised of the following (in thousands):

Years Ended December 31,
20232022
Domestic$(111,785)$(56,605)
Foreign(11,698)— 
Total Net loss before taxes$(123,483)$(56,605)

Any change in the fair value of the private placement and preferred warrants, which are classified as a liability on the Company’s consolidated balance sheets at December 31, 2023, is recognized as a gain or loss in the Company’s consolidated statements of operations. The warrants are deemed equity instruments for income tax purposes, and accordingly, there is no income tax expense or benefit 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,
20232022
Deferred tax assets:
Investment in DMS Holdings LLC$58,622 $34,137 
Reserve accruals65 156 
Charitable contributions23 18 
Interest carryforward10,681 5,131 
Tax credit carryforwards823 1,013 
Property and equipment— (7)
Intangibles
1,709 — 
Operating lease liabilities190 343 
Net operating loss1,851 2,863 
Total gross deferred tax assets73,964 43,654 
Less: Valuation allowance(71,942)(41,829)
Total deferred tax assets, net2,022 1,825 
Deferred tax liabilities:
Intangibles— (1,295)
Property and equipment(1)— 
Operating lease right-of-use assets(62)(119)
Undistributed earnings(2,273)(1,523)
Total deferred tax liabilities(2,336)(2,937)
Net deferred tax liabilities$(314)$(1,112)

At December 31, 2023, the Company has federal, foreign and state net operating loss carryforwards attributable to DMS, Inc. in the amount of $25.2 million, $3.9 million and $10.5 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, 2023, the Company has an expected federal and state income tax credit carryforward of $0.8 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 a valuation allowance of $71.9 million as of December 31, 2023. 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., UE, and ClickDealer.

At December 31, 2023 and December 31, 2022, the Company had a total of $8.3 million and $0.0 million in net unrecognized tax benefits, respectively, which reduced the Company’s deferred income tax assets and offsetting valuation allowance. These unrecognized tax benefits, if recognized, would not have an impact on the effective tax rate due to the offsetting valuation allowance. Unrecognized tax benefits were a net increase of $8.3 million and a net increase of $0.0 million during the years ended December 31, 2023 and 2022, respectively. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of the provision for income taxes. As of December 31, 2023 and December 31, 2022, the
Company had zero accrued interest and penalties associated with unrecognized tax benefits. Based on information available as of December 31, 2023, it is reasonably possible that the total amount of unrecognized tax benefits will decrease by $0 over the next 12 months. The Company believes that its unrecognized tax benefits as of December 31, 2023 are appropriately recorded for all years subject to examination.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):

Years Ended December 31,
20232022
Balance, beginning of year$— $— 
Additions for tax positions of the current years33,589 — 
Additions for tax positions of the prior years— — 
Reductions for tax positions of prior years— — 
Expiration of applicable statutes of limitations— — 
Balance, end of year$33,589 $— 

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 2020 to 2023. The Company’s state income tax returns are no longer subject to income tax examination by tax authorities prior to 2020; however, our net operating loss carryforwards arising prior to that year are subject to adjustment. In Netherlands, Ukraine and United Kingdom, the Company’s tax returns remain subject to examination by tax authorities for the year 2023, from the time of filing for a period of three years for Netherlands and Ukraine and four years for United Kingdom. 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 in the consolidated statements of operations. No interest expense or penalties were recognized during the years ended December 31, 2023 and 2022, 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.