XML 41 R24.htm IDEA: XBRL DOCUMENT
v3.22.4

Income Taxes | 12 Months Ended
--- | ---
Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Note 16. Income Taxes As a result of the IPO, Clearwater Analytics Holdings, Inc. owns a portion of CWAN Holdings, which contains all operations of the business and is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CWAN Holdings is generally not subject to U.S. federal, state, and local income taxes. Any taxable income or loss generated by CWAN Holdings is passed through to and included in the taxable income or loss of its members in accordance with the terms of the operating agreement of CWAN Holdings. Before the IPO, the majority of CWAN Holdings’ income was passed through to its members and nontaxable to the entity. CWAN Holdings’ international wholly-owned subsidiaries are subject to taxes in foreign jurisdictions. Clearwater Analytics Holdings, Inc. is taxed as a corporation and pays corporate federal, state, and local taxes on income allocated to it from CWAN Holdings based on Clearwater Analytics Holdings, Inc.’s economic interest held in CWAN Holdings. While the Company consolidates CWAN Holdings for financial reporting purposes, the Company will not be taxed on the earnings attributed to the non-controlling interests. As a result, the income tax burden on the earnings attributed to the non-controlling interests is not reported by the Company in its consolidated financial statements. The components of the net income (loss) before the provision for income taxes were as follows (in thousands):
|  | Year Ended December 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Domestic |  | $ | (9,306 | ) |  | $ | (11,117 | ) |  | $ | (46,789 | )
Foreign |  |  | 3,971 |  |  |  | 3,510 |  |  |  | 3,461 |
Total |  | $ | (5,335 | ) |  | $ | (7,607 | ) |  | $ | (43,328 | )
The provision for income taxes was as follows (in thousands):
|  | Year Ended December 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Federal |  | $ | — |  |  | $ | — |  |  | $ | — |
State |  |  | 491 |  |  |  | 111 |  |  |  | 29 |
International |  |  | 1,737 |  |  |  | 1,055 |  |  |  | 873 |
Total current income tax expense |  | $ | 2,228 |  |  | $ | 1,166 |  |  | $ | 902 |
Federal |  |  | — |  |  |  | — |  |  |  | — |
State |  |  | (3 | ) |  |  | (13 | ) |  |  | — |
International |  |  | (865 | ) |  |  | (666 | ) |  |  | — |
Total deferred income tax expense |  | $ | (868 | ) |  | $ | (679 | ) |  | $ | — |
Total provision for income taxes |  | $ | 1,360 |  |  | $ | 487 |  |  | $ | 902 |
The provision for income taxes differs from the amount computed by applying the statutory federal rate as follows (in thousands, except percentages):
|  | Year Ended December 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Tax at federal statutory rate |  | $ | (1,120 | ) |  | $ | (1,597 | ) |  | $ | (9,099 | )
Noncontrolling interest and nontaxable income |  |  | (41 | ) |  |  | 643 |  |  |  | 9,825 |
State taxes |  |  | (1,592 | ) |  |  | (1,935 | ) |  |  | 29 |
Foreign rate differential |  |  | 92 |  |  |  | 54 |  |  |  | (12 | )
Executive compensation deduction limitations |  |  | 5,544 |  |  |  | — |  |  |  | — |
Global intangible low taxed income inclusion |  |  | 1,854 |  |  |  | 845 |  |  |  | — |
Equity-based compensation |  |  | (2,316 | ) |  |  | (1,746 | ) |  |  | — |
Permanent items |  |  | 394 |  |  |  | (57 | ) |  |  | — |
Tax credits and incentives |  |  | (1,623 | ) |  |  | (55 | ) |  |  | — |
Return to provision |  |  | (38,107 | ) |  |  | (320 | ) |  |  | — |
Changes in tax law |  |  | 63,504 |  |  |  | — |  |  |  | — |
Valuation allowance |  |  | (25,356 | ) |  |  | 4,652 |  |  |  | — |
Other |  |  | 127 |  |  |  | 3 |  |  |  | 159 |
Total |  | $ | 1,360 |  |  | $ | 487 |  |  | $ | 902 |
Effective tax rate |  |  | (25.5 | %) |  |  | (6.4 | %) |  |  | (2.1 | %)
In 2022, our tax rate was affected by changes in tax law related to state tax rates and apportionment, a return to provision adjustment related to partnership basis of our continuing equity owners and their upstream entities, recognition of additional valuation allowance and the disallowance of tax deductibility of certain expenses. In 2021 and 2020, our tax rate was affected primarily by the recognition of a valuation allowance and the portion of earnings attributed to the non-controlling interests. Deferred income taxes result from differences in the recognition of amounts for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of our deferred income tax assets and liabilities are as follows (in thousands):
|  | Year Ended December 31, |
|  | 2022 |  |  | 2021 |
Investment in Partnership |  | $ | 336,276 |  |  | $ | 311,858 |
Loss and tax credit carryforwards |  |  | 80,711 |  |  |  | 75,931 |
Equity-based compensation |  |  | 8,336 |  |  |  | 7,935 |
Lease liability |  |  | 2,057 |  |  |  | — |
Other |  |  | 1,099 |  |  |  | 186 |
Total deferred tax assets |  | $ | 428,479 |  |  | $ | 395,910 |
Valuation allowance |  |  | (422,555 | ) |  |  | (395,220 | )
Net deferred tax asset |  | $ | 5,924 |  |  | $ | 690 |
Intangible assets |  |  | (7,364 | ) |  |  | — |
Right of use asset |  |  | (1,988 | ) |  |  | — |
Revenue |  |  | (833 | ) |  |  | — |
Other |  |  | (111 | ) |  |  | (15 | )
Total deferred tax liabilities |  |  | (10,296 | ) |  |  | (15 | )
Net deferred tax liabilities |  | $ | (4,372 | ) |  | $ | 675 |
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence during the year ended December 31, 2022, we believe that it is more likely than not that the tax benefits of the U.S. losses incurred may not be realized. Accordingly, we have recorded a full valuation allowance against the tax benefits of the U.S. losses incurred. We intend to maintain the full valuation allowance on the U.S. net deferred tax assets until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance. The valuation allowance increased $27 million during the year ended December 31, 2022 and was primarily attributable to increases in deferred taxes related to tax basis step ups from the non-controlling interests exchanging their partnership units for our publicly traded stock and the capitalization of R&D expenses under Section 174. As of December 31, 2022, we had net operating loss carryforwards of approximately $238 million for federal income tax purposes, a small portion of which will begin to expire in 2036 if unused. We had net operating loss carryforwards of approximately $318 million for state income tax purposes, which will begin to expire in the year 2025 if unused.‌ We had net operating loss carryforwards of approximately $9 million for foreign income tax purposes, which do not expire and can be carried forward indefinitely. As of December 31, 2022, we also had research and development credit carryforwards of approximately $3.1 million for federal income tax and $500,000 for state income tax purposes. The research and development tax credits will begin to expire in 2036 and 2034 for federal and state purposes, respectively, if unused. The federal and state net operating loss carryforwards may be subject to significant limitations under Section 382 and Section 383 of the Internal Revenue Code of 1986 and similar provisions under state law. The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. We have completed a Section 382 review and determined that none of our operating losses will expire solely due to Section 382 limitation(s). We indefinitely reinvest earnings from our foreign subsidiaries and therefore no deferred tax liability has been recognized on the basis difference created by such earnings. We have not provided foreign withholding taxes for any undistributed earnings of our foreign subsidiaries. A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands):
|  | Year Ended December 31, |
|  | 2022 |  |  | 2021 |  |  | 2020 |
Balance - Beginning of Year |  | $ | 3,548 |  |  | $ | — |  |  | $ | — |
Increases related to current year's tax positions |  |  | 959 |  |  |  | 89 |  |  |  | — |
Increases related to organizational transactions |  |  | — |  |  |  | 3,455 |  |  |  |
Increases (decreases) related to prior year's tax positions |  |  | (182 | ) |  |  | 3 |  |  |  | — |
Decreases related to lapse of statute |  |  | (487 | ) |  |  | — |  |  |  | — |
Increases related to exchanges |  |  | 94 |  |  |  | 1 |  |  |  | — |
Balance - End of Year |  | $ | 3,932 |  |  | $ | 3,548 |  |  | $ | — |
No ne of the tax benefits included in the balance of unrecognized tax benefits as of December 31, 2022 would affect the effective tax rate if recognized. We recognize interest and penalties related to unrecognized tax benefits as income tax expense. During the year ended December 31, 2022, 2021, and 2020, we did no t recognize any interest and penalties for income taxes. We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. As of December 31, 2022, all of the years remain open to examination by the federal and state tax authorities for three or four years from the tax year in which net operating losses or tax credits are utilized. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. Although the timing of the resolution, settlement, and closure of audits is not certain, we do not expect our unrecognized tax benefits to materially change in the next 12 months. On March 16, 2022, Idaho enacted House Bill 563 that amended portions of relevant tax laws. Due to our valuation allowance in the U.S., this legislation did not have a significant impact on the provision for income taxes for the year ended December 31, 2022. However, we expect our blended state tax rate to decrease due to the new law. On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors Act (“CHIPS Act”) was passed into law and amended portions of relevant tax laws. The CHIPS Act did not have a significant impact on the provision for income taxes for the year ended December 31, 2022. We do not expect this legislation to materially affect us. On August 16, 2022, the Inflation Reduction Act was passed into law and amended portions of relevant tax laws. The Inflation Reduction Act did not have a significant impact on the provision for income taxes for the year ended December 31, 2022. We do not expect this legislation to materially affect us. Tax Receivable Agreement Liability Pursuant to our election under Section 754 of the Internal Revenue Code (the “Code”), we expect to obtain an increase in our share of the tax basis in the net assets of CWAN Holdings when its units are redeemed or exchanged. We intend to treat any redemptions and exchanges of CWAN Holdings units as direct purchases of the units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. In connection with the IPO and related transactions, we entered into a TRA that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of CWAN Holdings resulting from any redemptions or exchanges of CWAN Holdings units, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest and TRA bonus payments pursuant to the TRA (the “TRA Payments”). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in CWAN Holdings or the Company. The rights of each member of CWAN Holdings, that is a party to the TRA, are assignable to transferees of their respective CWAN Holdings units. The estimation of a liability under the TRA is, by its nature, imprecise and subject to significant assumptions regarding a number of factors, including (but not limited to) the amount and timing of taxable income generated by the Company each year as well as the tax rate then applicable. The future tax benefits related to ownership exchanges as of December 31, 2022 are estimated to be $405 million, of which $345 million is estimated to be the associated TRA liability. As noted above, the Company evaluated the realizability of its U.S. deferred tax assets and has recorded a full valuation allowance against the future realization of those benefits. As such, no TRA liability related to future years has been recorded as of December 31, 2022, as it is not probable that we will realize any tax benefits. Before considering the tax benefits subject to our TRA Agreement, we estimate that we would have reported taxable income in 2022 due to the capitalization of research and development expenses under Section 174 and equity-based compensation expense that has not met the rules for tax deductibility. Therefore, we expect to utilize tax benefits subject to our TRA and have recorded the associated TRA expense and a TRA liability of $12.2 million as of December 31, 2022, of which $561,000 is related to the TRA Bonus Agreement and is recorded in general and administrative expenses in the Consolidated Statement of Operations. As non-controlling interest holders exercise their right to exchange their units in CWAN Holdings, a TRA liability may be recorded based on 85% of the estimated future tax benefits that the Company may realize as a result of increases in the tax basis of CWAN Holdings. The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend on, but is not limited to, the price of the Company’s Class A stock at the time of the relevant redemption or exchange.

X
- References No definition available. + Details
Name: | us-gaap_IncomeTaxDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI https://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI https://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI https://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI https://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI https://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
Name: | us-gaap_IncomeTaxDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration