Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Tax Disclosure

17. Income Taxes

The components of the Company’s income before income taxes and equity in earnings of non-consolidated affiliates by taxing jurisdiction for the years ended December 31, were:

	2023		2022		2021
Income (Loss):
U.S.	$	66,432	$	31,681	$	38,717
Non-U.S.	24,637		43,904		20,841
	$	91,069	$	75,585	$	59,558

The provision (benefit) for income taxes by taxing jurisdiction for the years ended December 31, were:

	2023		2022		2021
Current tax provision
U.S. federal	$	4,868	$	13,229	$	7,259
U.S. state and local	3,103		8,106		7,459
Non-U.S.	13,143		22,368		12,498
	21,114		43,703		27,216
Deferred tax provision (benefit):
U.S. federal	18,168		(16,132)		(143)
U.S. state and local	7,017		701		(2,521)
Non-U.S.	(5,742)		(2,810)		(1,154)
	19,443		(18,241)		(3,818)
Income tax expense	$	40,557	$	25,462	$	23,398

A reconciliation of income tax expense (benefit) using the U.S. federal income tax rate compared with actual income tax expense for the years ended December 31, is as follows:

	2023			2022			2021
Income before income taxes, equity in non-consolidated affiliates and noncontrolling interest	$	91,069		$	75,585		$	59,558
Statutory income tax rate	21.0		%	21.0		%	21.0		%
Tax expense using U.S. statutory income tax rate	$	19,124		$	15,873		$	12,507
Impact of disregarded entity structure	(8,520)			(3,355)			(6,954)
Foreign, net	(3,684)			6,930			5,995
State taxes, net	8,422			8,807			4,327
Stock compensation	400			(1,342)			4,009
Valuation allowance	11,791			4,932			(15)
Revaluation of TRA step up	(424)			(5,109)			—
Gain on sale of business	8,347			—
Prior year adjustments	5,617			(17,205)			—
Goodwill impairments	—			14,645			—
Other, net	(516)			1,286			3,529
Income tax expense	$	40,557		$	25,462		$	23,398
Effective income tax rate	44.5		%	33.7		%	39.3		%

Prior to merger, the Company was a limited liability company classified as a disregarded entity for U.S. federal income tax purposes, and as such was not subject to taxes from a U.S. federal income tax perspective. After the merger, the Company is a corporation with an investment in a limited liability company classified as a partnership for U.S. federal income tax purposes, and as such a portion of the consolidated income is not subject to taxes from a U.S. federal income tax perspective. The tax rate of 21.0% has been used to capture the U.S. federal taxes of the Company and the corporations owned by the Company and recorded in the Consolidated Statements of Operations and Comprehensive Income.

In August 2022, the United States enacted to the Inflation Reduction Act of 2022 (“IRA”), which creates a new book minimum tax of at least 15% of consolidated GAAP pre-tax income for corporations with average book income in excess of $1 billion. We do not expect an increase in our tax liability from this new book minimum tax in 2023.

Income taxes receivable were $21.6 million and $5.2 million at December 31, 2023 and 2022, respectively, and were included in other current assets on the balance sheet. Long-term income taxes receivable were $12.5 million at December 31, 2023 and 2022, and were included in other assets on the balance sheet. Income taxes payable were $5.7 million and $13.5 million at December 31, 2023 and 2022, respectively, and were included in accrued and other liabilities on the balance sheet.

The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, were as follows:

	2023		2022		2021
Deferred tax assets:
Net operating losses	$	29,835	$	44,001	$	33,112
Tax credits	6,355		7,104		6,644
Operating lease liability	50,657		52,442		48,173
Interest deductions	36,618		30,681		30,760
Accruals and other liabilities	252		2,794		3,720
TRA and related step-up, net of amortization	29,007		30,556		—
Other	13,568		10,584		15,160
Gross deferred tax asset	166,292		178,162		137,569
Less: valuation allowance	(26,288)		(14,395)		(5,825)
Net deferred tax assets	$	140,004	$	163,767	$	131,744
Deferred tax liabilities:
Right-of-use lease asset - operating leases	38,261		40,012		37,001
Property and equipment, net	11,553		9,329		4,212
Goodwill and intangibles	83,335		85,990		83,607
Residual basis differences	—		—		102,297
Other	205		940		6,854
Total deferred tax liabilities	133,354		136,271		233,971
Net deferred tax asset (liability)	$	6,650	$	27,496	$	(102,227)
Deferred tax assets	$	47,159	$	68,375	$	866
Deferred tax liabilities	(40,509)		(40,879)		(103,093)
	$	6,650	$	27,496	$	(102,227)

The preliminary deferred tax liability for the Company’s residual basis difference in OpCo of $102.3 million reflected in the table above as of December 31, 2021 was adjusted to zero as of December 31, 2022 to reflect the finalization of the Company’s book and tax basis in OpCo. This deferred tax liability had a balance of $119.5 million as of September 30, 2022 that should have been zero. In addition, a deferred tax liability of $16.7 million, and the associated reduction to additional paid-in-capital was not recorded when the exchanges of Paired Units for Class A Common Stock occurred in February 2022. The correction has been reflected as of December 31, 2022.

Tax Receivables Agreement

In connection with the closing of the Transaction, 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 in 2022 and no further exchanges in 2023. As of December 31, 2023, and 2022, the Company has recorded a TRA liability of $26.9 million and

$26.6 million, respectively, and a deferred tax asset, net of amortization of $29.0 million and $30.6 million, respectively, in connection with the exchanges of the Paired Units and the projected obligations under the TRA.

Stagwell Inc. itself has net operating loss carryforwards of $58.1 million relating to U.S. states which expire years 2026 through 2042. Stagwell Inc. also had indefinite net operating loss carryforwards less than $0.1 million relating to states. Stagwell Inc. also has foreign and state tax credits and general business carryovers of $6.4 million which expire between 2024 and 2031.

Stagwell Inc.’s consolidated corporate subsidiaries also have net operating loss carryforwards which expire in years 2031 through 2042. These definite lived net operating loss carryforwards consist of $13.8 million relating to U.S. federal, $8.0 million relating to states and $32.9 million relating to non-U.S. The corporate subsidiaries also have indefinite net operating loss carryforwards which consist of $17.1 million relating to U.S. federal, and $48.6 million relating to states, and $46.3 million relating to non-U.S. The majority of the consolidated corporate subsidiaries’ U.S. tax attributes are subject to an annual limitation as a result of historic acquisitions which constituted a change of ownership as defined under Internal Revenue Code 382.

The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management evaluates all positive and negative evidence and considers factors such as the reversal of taxable temporary differences, taxable income in eligible carryback years, future taxable income, and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.

The Company maintained a valuation allowance of $26.3 million as of December 31, 2023, relating to both U.S. and foreign deferred tax assets, and $14.4 million as of December 31, 2022 relating to U.S. and foreign deferred tax assets.

The Company is permanently reinvested with respect to its foreign earnings in certain jurisdictions, and no deferred taxes have been recorded related to such earnings as the determination of the amount is not practicable. The Company currently does not intend to distribute previously taxed income. Upon distribution in the future, the Company may incur state and foreign withholding taxes on such income, the amount of which is not practicable to compute.

As of December 31, 2023 and 2022, the Company recorded a liability for unrecognized tax benefits as well as applicable penalties and interest in the amount of $1.8 million and $2.2 million, respectively. It is the Company’s policy to classify interest and penalties arising in connection with unrecognized tax benefits as a component of income tax expense. As of December 31, 2023 and 2022, accrued penalties and interest included in unrecognized tax benefits were $1.8 million and less than $0.1 million, respectively. If these unrecognized tax benefits were to be recognized, it would affect the Company’s effective tax rate.

	2023		2022
A reconciliation of the change in unrecognized tax benefits is as follows:
Unrecognized tax benefit - Beginning Balance	$	2,136	$	1,038
Current year positions	288		—
Prior period positions	(1,840)		1,850
Settlements	(289)		(477)
Lapse of statute of limitations	(286)		(275)
Unrecognized tax benefits - Ending Balance	$	9	$	2,136

It is reasonably possible that the amount of unrecognized tax benefits could decrease by a range of $— to less than $0.1 million in the next twelve months as a result of expiration of certain statute of limitations.

The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The statute of limitations for tax years prior to 2020 are closed for U.S. federal purposes. The statute of limitations for tax years prior to 2017 have also expired in non-U.S. jurisdictions.