Income Taxes

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We are subject to U.S. federal and state taxes with respect to our allocable share of any taxable income or loss of MarketWise, LLC, as well as any stand-alone income or loss we generate. MarketWise, LLC is treated as a partnership for U.S. income tax purposes and for most applicable state and local income tax purposes and generally does not pay income taxes in most jurisdictions. Instead, MarketWise, LLC’s taxable income or loss is passed through to its members, including us.

Our effective income tax rate was 5.4% and 3.8% for the three and nine months ended September 30, 2023, respectively, and 7.7% and 5.1% for the three and nine months ended September 30, 2022, respectively. The main driver of the effective income tax rate for the three and nine months ended September 30, 2022 was the income allocation to the non-controlling interest. The main driver of the decrease in the effective tax rate from the three months ended September 30, 2022 is the change in the income allocation to the non-controlling interest. Our effective tax rate for the three and nine months ended September 30, 2023 differs from the U.S. federal statutory rate primarily because we generally do not record income taxes for the noncontrolling portion of pre-tax income.

As a result of the reverse capitalization in 2021, we recorded a deferred tax asset resulting from the outside basis difference in our interest in MarketWise, LLC. The Company considers both positive and negative evidence when measuring the need for a valuation allowance. A valuation allowance is not required to the extent that, in management’s judgment, positive evidence exists with a magnitude and duration sufficient to result in a conclusion that it is more likely than not (a likelihood of more than 50%) that the Company’s deferred tax assets will be realized.

In evaluating the need for a valuation allowance on the deferred tax asset, the company considered positive evidence related to its historic earnings, forecasted income and reversal of temporary differences. Therefore, the Company recorded a valuation allowance in the amount of $29,088 for certain deferred tax assets that are not more likely than not to be realized.

As part of the reverse capitalization in 2021, we entered into a Tax Receivable Agreement (“TRA”) with certain stockholders. Pursuant to our election under Section 754 of the Internal Revenue Code of 1986, as amended, and the regulations issued thereunder, we expect to receive a step up in the tax basis of our ownership in MarketWise, LLC as exchanges of the LLC Units (as defined herein) occur. These increases in tax basis may reduce the amount we may otherwise pay to various tax authorities in the future. The TRA liability represents approximately 85% of the calculated tax savings based on basis adjustments and other carryforward attributes assumed that we anticipate being able to utilize in future years. We will retain the remaining 15% of calculated tax savings. The payments contemplated by the TRA are not conditioned upon any continued ownership interest in MarketWise, LLC. The timing and amount of aggregate payments due pursuant to the TRA may vary based on several factors including the timing and amount of future taxable income, as well as future applicable tax rates. As such, significant inputs and assumptions are used to estimate the future expected payments under the TRA. During the three and nine months ended September 30, 2023, Members of MarketWise, LLC exchanged an aggregate of 1,500,000 and 2,750,000 common units of MarketWise, LLC (“LLC Units”) together with an equal number of shares of Class B common stock for 1,500,000 and 2,750,000 newly-issued shares of Class A common stock, respectively. As a result, we have recorded a liability of $2,096 under the TRA as of September 30, 2023. No payments have been made under the TRA and no payments are expected in the next 12 months.

As of September 30, 2023, we had no unrecognized tax positions and believe there will be no changes to uncertain tax positions within the next 12 months.