Income Taxes

12 Months Ended

Sep. 30, 2021

Income Taxes [Abstract]

Income Taxes

16. Income Taxes

The Company is a corporation and, as a result is subject to U.S. federal, state and local income taxes. OneWater LLC is treated as a pass-through entity for U.S. federal tax purposes and in most state and local jurisdictions. As such, OneWater LLC’s members, including the Company, are liable for federal and state income taxes on their respective shares of OneWater LLC’s taxable income.

The components of income tax expense are:

($ in thousands)	Year Ended September 30, 2021		Year Ended September 30, 2020
Current:
Federal	$	18,966	$	4,384
State		3,108		1,436
		22,074		5,820
Deferred:
Federal		3,341		395
State		387		114
		3,728		509
Income tax expense	$	25,802	$	6,329

A reconciliation of the United States statutory income tax rate to the Company’s effective income tax rate is as follows:

	For the Years Ended September 30,
	2021			2020			2019
Statutory federal tax rate		21.0	%		21.0	%		21.0	%
Income attributable to non-controlling interests and nontaxable income		(5.5	)		(12.4	)		(21.0	)
State income taxes, net of federal benefit		2.4			2.3			-
Other		0.8			0.6			-
Effective income tax rate		18.7	%		11.5	%		-	%

Details of the Company’s deferred tax assets and liabilities are as follows:

($ in thousands)	September 30, 2021		September 30, 2020
Deferred tax assets:
Investment in partnerships	$	19,293	$	9,063
Tax receivable agreement		9,817		3,791
Total		29,110		12,854
Valuation allowance		-		-
Total deferred tax assets		29,110		12,854
Total deferred tax liabilities		-		-
Deferred tax assets, net	$	29,110	$	12,854

The Company recognizes deferred tax assets to the extent it believes these assets are more-likely-than-not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, tax planning strategies and recent results of operations. Based on our cumulative earnings history and forecasted future sources of taxable income, we believe that we will fully realize our deferred tax asset in the future. The Company has not recorded a valuation allowance.

As of September 30, 2021 and 2020, the Company has not recognized any uncertain tax positions, penalties, or interest as management has concluded that no such positions exist. The Company is subject to examination in the US Federal and certain state tax jurisdictions for the tax years beginning with the year ended September 30, 2020. The Company is not currently under an income tax audit in any U.S. or state jurisdiction for any tax year.

Tax Receivable Agreement

In connection with the IPO, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with certain of the owners of OneWater LLC. As of September 30, 2021 and 2020, our liability under the Tax Receivable Agreement was $40.1 million and $15.6 million, respectively, representing 85% of the calculated net cash savings in U.S. federal, state and local income tax and franchise tax that OneWater Inc. anticipates realizing in future years from the result of certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of OneWater Inc.’s acquisition of OneWater LLC Units pursuant to an exercise of the Redemption Right or the Call Right (each as defined in the amended and restated limited liability company agreement of OneWater LLC (the “OneWater LLC Agreement”)).

The projection of future taxable income involves significant judgment. Actual taxable income may differ from our estimates, which could significantly impact our ability to make payments under the Tax Receivable Agreement. We have determined it is more-likely-than-not that we will be able to utilize all of our deferred tax assets subject to the Tax Receivable Agreement; therefore, we have recorded a liability under the Tax Receivable Agreement related to the tax savings we may realize from certain increases in tax basis and certain tax benefits attributable to imputed interest as a result of OneWater Inc.’s acquisition of OneWater LLC Units pursuant to an exercise of the Redemption Right or Call Right (each as defined in the OneWater LLC Agreement). If we determine the utilization of these deferred tax assets is not more-likely-than-not in the future, our estimate of amounts to be paid under the Tax Receivable Agreement would be reduced. In this scenario, the reduction of the liability under the Tax Receivable Agreement would result in a benefit to our consolidated statements of operations.