Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Tax Disclosure

14. Income Taxes

Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in interim periods.

The Company had an income tax expense for the three months ended September 30, 2022 of $11,540 (on a pre-tax income of $46,601 resulting in an effective tax rate of 24.8%) compared to income tax expense of $5,183 (on pre-tax income of $13,182 resulting in an effective tax rate of 39.3%) for the three months ended September 30, 2021.

The difference in the effective tax rate of 24.8% in the three months ended September 30, 2022 as compared to 39.3% in the three months ended September 30, 2021 was primarily attributable to higher non-deductible share based compensation in September 30, 2021, and favorable return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.

The Company had an income tax expense for the nine months ended September 30, 2022 of $20,150 (on a pre-tax income of $112,512 resulting in an effective tax rate of 17.9%) compared to income tax expense of $9,205 (on pre-tax income of $40,466 resulting in an effective tax rate of 22.7%) for the nine months ended September 30, 2021.

The difference in the effective tax rate of 17.9% in the nine months ended September 30, 2022 as compared to 22.7% in the nine months ended September 30, 2021 was primarily related to favorable adjustments for share-based compensation vesting and return to provision adjustments at September 30, 2022, offset in part by the impact of non-deductible goodwill impairments in September 30, 2022.

In connection with the finalization of the MDC purchase accounting, the Company finalized its tax basis calculations and adjusted deferred taxes and goodwill. The change in goodwill also impacted the deferred tax liability on Company’s ownership interest in OpCo. This change has been accounted for as an equity transaction resulting in a reduction in paid in capital of $17,303.

Tax Receivables Agreement

In connection with the closing of the Transactions, we entered into the Tax Receivables Agreement (“TRA”) with OpCo and Stagwell Media, pursuant to which we are required to make cash payments to Stagwell Media equal to 85% of certain U.S. federal, state and local income tax or franchise tax savings, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) increases in the tax basis of OpCo’s assets resulting from exchanges of Paired Units (defined in Note 11) for shares of Class A Common Stock or cash, as applicable, and (ii) certain other tax benefits related to us making payments under the TRA.

The Company accounts for amounts payable under the TRA in accordance with ASC 450—Contingencies. We will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance and a corresponding reduction to the TRA liability. The amounts to be recorded for both the deferred tax assets and the liability under the TRA will be estimated at the time of any purchase or exchange as a reduction to shareholders’ equity, and the effects of changes in any of our estimates after this date will be included in net income or loss. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income or loss.

In the first quarter of 2022, the Company had its first exchange of Paired Units for shares of Class A Common Stock and recorded its initial TRA liability. Further exchanges have been made in the subsequent quarters. As of September 30, 2022, the Company had a TRA liability of $17,649 and has recognized deferred tax benefits of $20,763 as a reduction to the net deferred tax liability on its unaudited condensed consolidated balance sheets in connection with the exchanges of the Paired Units and the projected obligations under the TRA.