Income Taxes

9 Months Ended

Sep. 30, 2024

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, 2024 of $5.7 million (on a pre-tax income of $19.6 million resulting in an effective tax rate of 29.1%) compared to income tax expense of $4.3 million (on pre-tax income of $7.4 million resulting in an effective tax rate of 58.1%) for the three months ended September 30, 2023.

The difference in the effective tax rate of 29.1% in the three months ended September 30, 2024, as compared to 58.1% in the three months ended September 30, 2023, is primarily due to an increase in tax benefit from the disregarded entity structure which is partially offset by a reduction in tax benefits recognized with respect to uncertain tax positions.

The Company had an income tax expense for the nine months ended September 30, 2024 of $9.4 million (on a pre-tax income of $18.1 million resulting in an effective tax rate of 52.1%) compared to income tax expense of $5.0 million (on pre-tax income of $0.7 million resulting in an effective tax rate of 687.3%) for the nine months ended September 30, 2023.

The difference in the effective tax rate of 52.1% in the nine months ended September 30, 2024, as compared to 687.3% in the nine months ended September 30, 2023, is primarily due to the small pre-tax income in 2023 as compared to 2024 as well as an increase in the tax benefit of the disregarded entity structure and a reduction in tax expense for uncertain tax positions, partially offset by an increase in current losses subject to valuation allowance, a reduction in tax benefits for share based compensation, and a reduction in tax benefits recognized with respect to lease impairments.

The OECD (Organisation for Economic Co-operation and Development) has proposed a global minimum tax of 15% of reported profits (Pillar 2) that has been agreed upon in principle by over 140 countries. During 2023, many countries took steps to incorporate Pillar 2 model rule concepts into their domestic laws. Although the model rules provide a framework for applying the minimum tax, countries may enact Pillar 2 slightly differently than the model rules and on different timelines and may adjust domestic tax incentives in response to Pillar 2. Accordingly, we are still evaluating the potential consequences of Pillar 2 on our longer-term financial position. In 2024, we expect to incur insignificant tax expenses in connection with Pillar 2.

Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next 12 months, based on the information currently available, we do not expect any change to be material to our unaudited consolidated financial statements.

Tax Receivables Agreement

In connection with the Tax Receivable Agreement (“TRA”), the Company is required to make cash payments to Stagwell Media LP (“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 TRA liability is an estimate and actual amounts payable under the TRA could differ from this estimate.

There were no exchanges of Paired Units for shares of Class A Common Stock during 2024. As of September 30, 2024, the Company has recorded a TRA liability of $26.7 million, and an associated deferred tax asset, net of amortization, of $29.0 million, in connection with the exchange of Paired Units and the projected obligations under the TRA