Income Taxes

12 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

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 (benefit) expense are:

($ in thousands)	Year Ended September 30, 2023		Year Ended September 30, 2022		Year Ended September 30, 2021
Current:
Federal	$	16,184	$	31,986	$	18,966
State	3,434		5,492		3,108
Foreign	—		6		—
	19,618		37,484		22,074
Deferred:
Federal	(19,171)		5,376		3,341
State	(3,859)		365		387
Foreign	—		—		—
	(23,030)		5,741		3,728
Income tax (benefit) expense	$	(3,412)	$	43,225	$	25,802

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,
	2023		2022		2021
Statutory federal tax rate	21.0	%	21.0	%	21.0	%
Income attributable to non-controlling interests and nontaxable income	(0.2)		(2.3)		(5.5)
State income taxes, net of federal benefit	3.3		2.9		2.4
Loss on impairment	(11.4)		—		—
Other	(4.7)		0.4		0.8
Effective income tax rate	8.0	%	22.0	%	18.7	%

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

($ in thousands)	September 30, 2023		September 30, 2022
Deferred tax assets:
Investment in partnerships	$	23,619	$	—
Tax receivable agreement	10,702		11,609
Net operating loss	1,557		—
Other	—		3
Total	35,878		11,612
Valuation allowance	—		—
Total deferred tax assets	35,878		11,612
Deferred tax liabilities:
Investment in partnerships	$	—	$	2,410
Fixed assets	107		66
Intangibles	703		703
Other	2		—
Total deferred tax liabilities	812		3,179
Deferred tax assets, net	$	35,066	$	8,433

The Company had federal net operating loss carryforwards from underlying corporate entities of approximately $6 million resulting in a deferred tax asset of $1.6 million. The U.S. federal net operating loss carryforwards have no expiration but can only be used to offset up to 80% of future taxable income annually.

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 assets in the future. The Company has not recorded a valuation allowance.

As of September 30, 2023 and 2022, 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 December 31, 2020. In November 2022, the Company received notification that the IRS intended to commence an audit of the federal income tax return of OneWater LLC’s partnership for the tax year ended December 31, 2020. The audit is ongoing and the outcome and timing of settlements of asserted income tax liabilities, if any, are subject to significant uncertainty.

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, 2023 and 2022, our liability under the Tax Receivable Agreement was $43.1 million and $46.4 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.