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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Taxes |
Income Taxes | 9. Income Taxes For the year ended December 31, 2019, total income before the provision for income taxes amounted to $225.3 million, consisting of $207.7 million in the United States and $17.6 million in foreign locations. The provision for income taxes consists of the following (in thousands):
|  | Successor |  | Successor |  |  | Predecessor |  | Predecessor
|  | Year Ended |  | October 1, 2018 to |  |  | January 1, 2018 to |  | Year Ended
|  | December 31, |  | December 31, |  |  | September 30, |  | December 31,
|  | 2019 |  | 2018 |  |  | 2018 |  | 2017
Current: |  |  |  |  |  |  |  |  |  |  |  |  |
Federal |  | $ | 21,373 |  | $ | — |  |  | $ | — |  | $ | —
State and Local |  |  | 11,537 |  |  | 1,235 |  |  |  | 5,739 |  |  | 4,331
Foreign |  |  | 4,368 |  |  | 1,212 |  |  |  | 3,559 |  |  | 2,748
Total current tax expense |  |  | 37,278 |  |  | 2,447 |  |  |  | 9,298 |  |  | 7,079
Deferred: |  |  |  |  |  |  |  |  |  |  |  |  |
Federal |  |  | (88) |  |  | 680 |  |  |  | 1,085 |  |  | (433)
State and local |  |  | 18,194 |  |  | 288 |  |  |  | 1,517 |  |  | (517)
Foreign |  |  | (3,082) |  |  | — |  |  |  | — |  |  | —
Total deferred tax expense |  |  | 15,024 |  |  | 968 |  |  |  | 2,602 |  |  | (950)
Total provision for income taxes |  | $ | 52,302 |  | $ | 3,415 |  |  | $ | 11,900 |  | $ | 6,129
A reconciliation of the statutory tax rate to the effective rate is as follows:
|  | Successor |  | Successor |  |  | Predecessor |  | Predecessor |
|  | Year Ended |  | October 1, 2018 to |  |  | January 1, 2018 to |  | Year Ended |
|  | December 31, |  | December 31, |  |  | September 30, |  | December 31, |
|  | 2019 |  | 2018 |  |  | 2018 |  | 2017 |
Statutory U.S. federal income tax rate |  |  | 21.0 | % |  | 21.0 | % |  |  | 21.0 | % |  | 35.0 | %
State and local income taxes, net of federal income tax benefit |  |  | 3.9 |  |  | 4.7 |  |  |  | 5.1 |  |  | 2.8 |
Foreign tax rate differential |  |  | (1.1) |  |  | 3.7 |  |  |  | 2.5 |  |  | 3.1 |
Tax Cuts and Jobs Act provisional tax charge |  |  | — |  |  | — |  |  |  | — |  |  | 2.2 |
LLC flow-through structure |  |  | — |  |  | (19.0) |  |  |  | (20.2) |  |  | (36.3) |
Non-controlling interest |  |  | (7.2) |  |  | — |  |  |  | — |  |  | — |
Tax Receivable Agreement adjustment |  |  | (3.1) |  |  | — |  |  |  | — |  |  | — |
Rate change |  |  | 10.2 |  |  | — |  |  |  | — |  |  | — |
Other |  |  | (0.5) |  |  | — |  |  |  | — |  |  | — |
Effective income tax rate |  |  | 23.2 | % |  | 10.4 | % |  |  | 8.4 | % |  | 6.8 | %
The Company’s consolidated effective tax rate for the year ended December 31, 2019 was 23.2% as compared to 10.4% in the 2018 Successor Period and 8.4% in the 2018 Predecessor Period. The effective tax rate increased from prior periods due to the Reorganization Transactions. Prior to the Reorganization Transactions, income taxes consisted only of business taxes incurred by TWM LLC and certain subsidiaries for business conducted in certain state, local and foreign jurisdictions as well as federal, state and local taxes for certain subsidiaries that are taxed as corporations for U.S. tax purposes. As a result of the Reorganization Transactions, the Corporation is subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and is taxed at prevailing corporate tax rates. The Company’s actual effective tax rate will be impacted by the Corporation’s ownership share of TWM LLC, which is expected to continue to increase over time as Continuing LLC Owners redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable, or the Corporation purchases LLC Interests from Continuing LLC Owners. In addition to the Reorganization Transactions, the tax impact of state apportionment rate changes on total tax expense as a result of the reduction of the Company’s net deferred asset was 10.2% in 2019 due to the reduction of the Company’s net deferred tax asset. The Company's consolidated effective tax rate will vary from period to period depending on changes in the mix of earnings, tax legislation and tax rates in various jurisdictions. The components of the Company’s net deferred tax asset (liability) are as follows (in thousands):
|  | Successor |  | Successor
|  | Year Ended |  | Year Ended
|  | December 31, |  | December 31,
|  | 2019 |  | 2018
Deferred tax assets: |  |  |  |  |  |
Investment in partnership |  | $ | 226,241 |  | $ | —
Net operating losses |  |  | 1,753 |  |  | 6,810
Tax Receivable Agreement - Interest |  |  | 10,395 |  |  | —
Employee compensation |  |  | 9,888 |  |  | —
Tax credits |  |  | 8,342 |  |  | —
Other |  |  | 4,088 |  |  | 2,362
Deferred tax assets, gross |  |  | 260,707 |  |  | 9,172
Valuation Allowance |  |  | — |  |  | —
Total deferred tax assets, net |  |  | 260,707 |  |  | 9,172
Deferred tax liabilities |  |  |  |  |  |
Goodwill and Intangibles |  |  | (25,829) |  |  | (28,799)
Total deferred tax liabilities |  |  | (25,829) |  |  | (28,799)
Total net deferred tax asset (liability) |  | $ | 234,878 |  | $ | (19,627)
The Company expects to obtain an increase in its share of the tax basis of the assets of TWM LLC when LLC Interests are redeemed or exchanged by the Continuing LLC Owners and in connection with certain other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that the Corporation would otherwise pay in the future to various tax authorities. Pursuant to the Tax Receivable Agreement, the Corporation is required to make cash payments to the Continuing LLC Owners equal to 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that the Corporation actually realizes (or in some circumstances are deemed to realize) as a result of certain future tax benefits to which we may become entitled. The Corporation expects to benefit from the remaining 50% of tax benefits, if any, that the Corporation may actually realize. See Note 10 – Tax Receivable Agreement. As a result of the Reorganization Transactions, the IPO, the October 2019 follow-on offering and LLC Interest ownership changes during the year ended December 31, 2019, the Company assumed a deferred tax benefit of $269.6 million, primarily due to an increase in amortizable tax basis that will be amortized primarily over 15 years pursuant to Section 197 of the Internal Revenue Code of 1986, as amended, offset by other factors. The tax benefit has been recognized in deferred tax asset on the December 31, 2019 consolidated statement of financial condition. As of December 31, 2019, the Company had New York State and New York City net operating loss carryforwards for income tax purposes of $15.7 million and $13.9 million, respectively. If not utilized, the state and local net operating loss carryforwards will begin to expire in 2035. The components of the Company’s uncertain tax positions are as follows (in thousands):
|  | Successor |
|  | December 31, |
|  | 2019 |
Gross unrecognized tax benefits as of January 1 |  | $ | 3,348 |
Increase in current year tax positions |  |  | 2,162 |
Increase in prior year tax positions |  |  | — |
Acquired tax positions |  |  | 1,789 |
Settlements |  |  | (787) |
Gross unrecognized tax benefits as of December 31 |  | $ | 6,512 |
The Company recognizes interest and penalties related to income taxes within the provision for income taxes in the consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in the consolidated statements of financial condition. The total amount of interest and penalties accrued as of December 31, 2019 are $2.3 million and $0.5 million, respectively. In 2019, TWM LLC settled its audits with the City of New York related to New York City Unincorporated Business Tax for years 2009 – 2011. Through the settlement, the Company reduced its uncertain tax positions by $0.8 million. TWM LLC is still under audit by the City of New York for the tax years 2012 – 2014. As a result of the Refinitiv Contribution, the Company assumed the tax liabilities of the contributed entity. The contributed entity is under audit by the State of New Jersey for the tax years 2012 - 2015 and is appealing a tax assessment from an audit by the State of New Jersey for the tax years 2008 - 2011. At December 31, 2019, the tax liability, interest and penalties related to the Refinitiv Contribution is $2.7 million and is included within accounts payable, accrued expenses and other liabilities on the consolidated statement of financial condition. The Company is indemnified by Refinitiv for tax liabilities that were assumed by the Company as a result of the Refinitiv Contribution. An indemnification asset has been recorded for this item. See Note 14 – Related Party Transactions. The above tax positions were recognized using the best estimate of the amount expected to be paid based on available information and assessment of all relevant factors. Due to the uncertainty associated with tax audits, it is possible that at some future date liabilities resulting from these audit could vary significantly from these positions. Nevertheless, based on currently enacted legislation and information currently known to us, the Company believes that the ultimate resolution of these audits will not have a material adverse impact on the Company’s financial condition taken as a whole.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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