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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | 12. Income Taxes The income before provision for income taxes consists of the following:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (Dollars in millions)
U.S. domestic income | $ | 1,402.9 |  |  | $ | 3,816.2 |  |  | $ | 439.5 |
Foreign income | 169.6 |  |  | 211.3 |  |  | 140.5 |
Total income before provision for income taxes | $ | 1,572.5 |  |  | $ | 4,027.5 |  |  | $ | 580.0 |
The provision for income taxes consists of the following:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (Dollars in millions)
Current |  |  |  |  |
Federal income tax | $ | 263.6 |  |  | $ | 351.3 |  |  | $ | 0.3 |
State and local income tax | 30.4 |  |  | 59.6 |  |  | 3.6 |
Foreign income tax | 55.6 |  |  | 56.5 |  |  | 50.2 |
Total current | 349.6 |  |  | 467.4 |  |  | 54.1 |
Deferred |  |  |  |  |
Federal income tax | (25.1) |  |  | 450.7 |  |  | 127.2 |
State and local income tax | (3.3) |  |  | 48.9 |  |  | 15.8 |
Foreign income tax | (33.4) |  |  | 15.3 |  |  | 0.1 |
Total deferred | (61.8) |  |  | 514.9 |  |  | 143.1 |
Total provision for income taxes | $ | 287.8 |  |  | $ | 982.3 |  |  | $ | 197.2 |
The following table summarizes the effective income tax rate:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (Dollars in millions)
Income before provision for income taxes | $ | 1,572.5 |  |  | $ | 4,027.5 |  |  | $ | 580.0 |
Provision for income taxes | $ | 287.8 |  |  | $ | 982.3 |  |  | $ | 197.2 |
Effective income tax rate | 18.30 | % |  | 24.39 | % |  | 34.00 | %
The effective tax rate is impacted by a variety of factors, including, but not limited to, changes in the sources of income or loss during the period and whether such income or loss is taxable to the Company and its subsidiaries. The following table reconciles the effective income tax rate to the U.S. federal statutory tax rate:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
Statutory U.S. federal income tax rate | 21.00 | % |  | 21.00 | % |  | 21.00 | %
State and local income taxes | 0.83 | % |  | 2.35 | % |  | 2.08 | %
Foreign income taxes(1) | (1.75) | % |  | 0.64 | % |  | 4.76 | %
Income passed through to common unitholders and non-controlling interest holders(2) | (0.67) | % |  | (0.07) | % |  | (2.02) | %
Equity-based compensation | (0.67) | % |  | (0.60) | % |  | (3.09) | %
Valuation allowance | 0.30 | % |  | 0.79 | % |  | (2.25) | %
Impact of change in tax status due to Conversion(3) | — | % |  | — | % |  | 14.59 | %
Unrecognized tax benefits | 0.01 | % |  | 0.02 | % |  | 1.64 | %
Other adjustments(4) | (0.75) | % |  | 0.26 | % |  | (2.71) | %
Effective income tax rate | 18.30 | % |  | 24.39 | % |  | 34.00 | %
(1)2022 includes a tax benefit due to restructuring the ownership of its foreign Global Investment Solutions business and the impact of amending the Company's 2020 tax return to claim a foreign tax credit rather than the original filing position claiming a foreign tax deduction. In addition, 2022 and 2021 include the impact of claiming foreign tax credits while 2020 includes the deduction of foreign taxes. (2)Includes income that is not taxable to the Company and its subsidiaries. (3)Refer to Note 11 in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for more information on the tax impacts of the Company's Corporate Conversion completed January 1, 2020. (4)2020 includes a benefit of (2.64)% related to the disposal of certain foreign subsidiaries, which resulted in the recognition of long-term capital losses. Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. The following table summarizes the tax effects of the temporary differences:
| As of December 31,
| 2022 |  | 2021
| (Dollars in millions)
Deferred tax assets |  |  |
Federal foreign tax credit carryforward | $ | 37.3 |  |  | $ | 22.0 |
State net operating loss carryforwards | 5.9 |  |  | 5.9 |
Tax basis goodwill and intangibles | 259.8 |  |  | 290.9 |
Depreciation and amortization | 25.4 |  |  | 18.9 |
Deferred restricted stock unit compensation | 24.7 |  |  | 31.4 |
Lease liabilities | 119.0 |  |  | 113.4 |
Accrued compensation | 781.3 |  |  | 883.6 |
Basis difference in investments | — |  |  | 22.9 |
Other | 140.4 |  |  | 118.2 |
Deferred tax assets before valuation allowance | 1,393.8 |  |  | 1,507.2 |
Valuation allowance | (56.7) |  |  | (46.8) |
Total deferred tax assets | $ | 1,337.1 |  |  | $ | 1,460.4 |
Deferred tax liabilities(1) |  |  |
Unrealized appreciation on investments | $ | 1,558.0 |  |  | $ | 1,804.9 |
Lease right-of-use assets | 89.2 |  |  | 85.0 |
Basis difference in investments | 47.9 |  |  | — |
Other | 28.9 |  |  | 43.1 |
Total deferred tax liabilities | $ | 1,724.0 |  |  | $ | 1,933.0 |
Net deferred tax assets (liabilities) | $ | (386.9) |  |  | $ | (472.6) |
(1)As of December 31, 2022 and 2021, $1,321.3 million and $1,445.9 million, respectively, of deferred tax assets were offset and presented as a single deferred tax liability amount on the Company’s consolidated balance sheet as these deferred tax assets and liabilities relate to the same jurisdiction. The Company had $15.8 million and $14.5 million in deferred tax assets as of December 31, 2022 and 2021, respectively, which are offset with deferred tax liabilities where those assets and liabilities relate to the same tax jurisdiction. In both years, the deferred tax assets resulted primarily from the carryforward of federal and state tax attributes, offset by a valuation allowance, and temporary differences between the financial statement and tax bases of assets and liabilities at the Company’s foreign sub-advisor entities. The realization of the deferred tax assets is dependent on the Company’s future taxable income before deductions related to the establishment of its deferred tax assets. The deferred tax asset balance is comprised of a portion that would be realized in connection with future ordinary income and a portion that would be realized in connection with future capital gains. The Company evaluated various sources of evidence in determining the ultimate realizability of its deferred tax assets including the character and timing of projected future taxable income and the Company’s ability to claim a foreign tax credit (“FTC”). The Company continues to maintain a valuation allowance on certain state net operating losses for a corporate subsidiary with entity level state net operating losses that cannot be utilized by other group members. In addition, the Company continues to maintain a valuation allowance on the FTC carryforward generated in 2014 and forward and other unused FTCs in 2022 that are not expected to be realized due to federal limitations on its utilization. As of December 31, 2022 and 2021, the Company established a valuation allowance of $56.7 million and $46.8 million, respectively, with the net increase primarily due to the FTC carryforward and related deferred tax assets offset by a release of the valuation allowance on tax attribute carryforwards that were utilized or written off in 2022 as well as certain foreign net operating losses that are not expected to be realized. For all other deferred tax assets, the Company has concluded it is more likely than not that they will be realized and that a valuation allowance is not needed at December 31, 2022. The Company has deferred tax liabilities of $402.7 million and $487.1 million as of December 31, 2022 and 2021, respectively, which are offset with deferred tax assets where those assets and liabilities relate to the same tax jurisdiction. These deferred tax liabilities primarily resulted from temporary differences between the financial statement and tax bases of accrued performance allocations. These deferred tax liabilities are net of related compensation and offset by step-up in tax basis resulting from Conversion and future amortization of tax basis intangible assets generated from exchanges covered by the Tax Receivable Agreement (see Note 3). As of December 31, 2022, the Company has cumulative state pre-tax net operating loss carryforwards of approximately $69.6 million ($5.8 million tax-effected), which will be available to offset future taxable income. If unused, a portion of the state carryforwards will begin to expire in 2023. The Company recorded a valuation allowance on $2.1 million of the state tax-effected net operating loss carryforwards which it believes will not be realized. In addition, the Company has a FTC carryforward of $37.3 million, which relates to taxes paid in foreign jurisdictions. If unused, a portion will expire in 2024 and years forward. Therefore, the Company recorded a full valuation allowance of $37.3 million on the FTC carryforward. The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax regulators. With a few exceptions, as of December 31, 2022, the Company’s U.S. federal income tax returns for the years 2019 through 2021 are open under the normal three years statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2017 to 2021. Foreign tax returns are generally subject to audit from 2011 to 2021. Certain of the Company’s affiliates are currently under audit by federal, state and foreign tax authorities. The Company does not believe that the outcome of the audits will require it to record unrecognized tax benefits or that the outcome will have a material impact on the consolidated financial statements. Under U.S. GAAP for income taxes, the amount of tax benefit to be recognized is the amount of benefit that is “more likely than not” to be sustained upon examination. The Company has recorded unrecognized tax benefits of $39.3 million and $30.4 million as of December 31, 2022 and 2021, respectively, which is reflected in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. These balances include $13.1 million and $9.8 million as of December 31, 2022 and 2021, respectively, related to interest and penalties associated with uncertain tax positions. If recognized, $27.1 million of uncertain tax positions would be recorded as a reduction in the provision for income taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of penalties and interest, is as follows:
| As of December 31,
| 2022 |  | 2021 |  | 2020
| (Dollars in millions)
Balance at January 1 | $ | 20.6 |  |  | $ | 17.2 |  |  | $ | 10.1 |
Additions based on tax positions related to current year | 2.4 |  |  | 1.3 |  |  | 8.7 |
Additions for tax positions of prior years | 5.3 |  |  | 2.6 |  |  | — |
Reductions for tax positions of prior years | (1.6) |  |  | (0.5) |  |  | (0.1) |
Reductions due to lapse of statute of limitations | (0.5) |  |  | — |  |  | (0.6) |
Reductions due to settlements | — |  |  | — |  |  | (0.9) |
Balance at December 31 | $ | 26.2 |  |  | $ | 20.6 |  |  | $ | 17.2 |
The Company does not believe that it has any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA enacted a 15% alternative minimum tax on the “adjusted financial statement income” of certain large corporations and a 1% excise tax on certain actual and deemed stock repurchases, both of which become effective in 2023. While the IRA has no effect on the 2022 financial statements, the Company is continuing to evaluate the impact of the IRA on its financial statements as further information becomes available.

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