Income Taxes

3 Months Ended

Mar. 31, 2023

Income Tax Disclosure [Abstract]

Income Tax Disclosure

13. 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 March 31, 2023 of $2.4 million (on a pre-tax loss of $2.4 million resulting in an effective tax rate of (99.1)%) compared to income tax expense of $3.2 million (on pre-tax income of $35.8 million resulting in an effective tax rate of 8.9%) for the three months ended March 31, 2022.

The difference in the effective tax rate of (99.1)% in the three months ended March 31, 2023, as compared to 8.9% in the three months ended March 31, 2022, is due to the pre-tax loss, an increase in valuation allowance, and an increase in uncertain tax positions in 2023.

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may decrease by up to $2.6 million based on expected settlements.

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 10) 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.

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 were made in subsequent quarters in 2022. No exchanges were made in the first quarter of 2023. As of March 31, 2023, the Company has recorded a TRA liability of $28.7 million and an associated deferred tax asset of $33.8 million.