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Tax Receivable Agreement Liability | 6 Months Ended
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Jun. 30, 2024
Income Tax Disclosure [Abstract] |
Tax Receivable Agreement Liability | Income Taxes As a part of the Up-C structure, 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. 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 interest is not reported by the Company in its condensed consolidated financial statements. Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in the applicable quarter. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate may be subject to significant volatility due to several factors, including our ability to accurately predict the proportion of our pretax income in multiple jurisdictions, certain book-tax differences, and exchanges from non-controlling interests. The following table provides details of the provision for (benefit from) income taxes:
| Three Months Ended June 30, | Six Months Ended June 30, |  |
| 2024 |  | 2023 | 2024 |  | 2023 |  |  |  |
Income (loss) before income taxes | $ | 355 |  |  | $ | (12,050) |  | $ | 2,492 |  |  | $ | (17,203) |  |  |  |  |
Provision for (benefit from) income taxes | 79 |  |  | (174) |  | (19) |  |  | 90 |  |  |  |  |
Effective tax rate | 22.3 | % |  | 1.4 | % | (0.8 | %) |  | (0.5 | %) |  |  |  |
For the three and six months ended June 30, 2024 and June 30, 2023, the Company’s effective tax rate was different than the statutory rate primarily because of foreign taxes, equity-based compensation, the generation of tax credits and incentives, and the valuation allowance on U.S. deferred tax assets. In addition, the Company is not liable for income taxes on the portion of CWAN Holdings’ earnings that are attributable to the non-controlling interest. The Company regularly monitors its uncertain tax positions, and as of June 30, 2024, there were no material unrecognized tax benefits that, if realized, would affect the estimated annual effective tax rate, nor do we expect any significant changes within the next 12 months. 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 as of June 30, 2024, we believe that it is more likely than not that the tax benefits of the U.S. deferred tax assets may not be realized. Accordingly, we have recorded a full valuation allowance against the U.S. net deferred tax assets. In our valuation allowance evaluation, we give more weight to evidence that can be objectively verified than to evidence that cannot be objectively verified. Our consideration of the evidence requires management to make a number of significant judgements, estimates, and assumptions about highly complex and inherently uncertain matters. Tax Receivable Agreement Liability Pursuant to our election under Section 754 of the Internal Revenue Code of 1986, as amended (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 our 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 bonus payments pursuant to the TRA Bonus Agreements (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 completed as of June 30, 2024 are estimated to be $490 million, of which $416 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 June 30, 2024. Before considering the tax benefits subject to our TRA, we estimate that we will report taxable income in 2024 primarily due to capitalization of research and development expenses under Section 174 and equity-based compensation expense that has either not yet met the rules for deductibility or has had the deduction limited under Section 162(m). As there are many assumptions and considerations that impact our taxable income position in the current year, the estimate of our taxable income position (and thus, the TRA liability recognized) for the current year could change significantly. A reconciliation of the beginning and ending balance of the TRA liability is as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30,
| 2024 |  | 2023 | 2024 |  | 2023
Beginning | $ | 17,050 |  |  | $ | 12,305 |  | $ | 18,894 |  |  | $ | 12,200 |
TRA expense related to current year | 5,915 |  |  | 6,573 |  | 6,201 |  |  | 6,678 |
TRA bonus expense related to the current year | 285 |  |  | 322 |  | 299 |  |  | 322 |
Payments | — |  |  | — |  | (2,144) |  |  | — |
Ending | $ | 23,249 |  |  | $ | 19,200 |  | $ | 23,249 |  |  | $ | 19,200 |
Tax receivable agreement expense | 5,915 |  |  | 6,573 |  | 6,201 |  |  | 6,678 |
TRA bonus expense in operating expenses | 285 |  | 322 |  | 299 |  | 322 |
Total expense | $ | 6,200 |  |  | $ | 6,895 |  | $ | 6,500 |  |  | $ | 7,000 |
As of June 30, 2024, the non-controlling interest holders held 27,535,479 units in CWAN Holdings that could, at their discretion, be exchanged for Class A shares. As units are exchanged, we may record future tax benefits and an associated TRA liability as a result of the increases in our tax basis in CWAN Holdings from the exchanges. The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend (among other things) on the price of the Company’s Class A stock at the time of the relevant redemption or exchange. If the non-controlling interest holders exchanged all of their units at the Company’s Class A stock price as of June 30, 2024, we estimate the future tax benefits related to these hypothetical exchanges to be $173 million, of which $147 million is estimated to be the associated TRA liability.

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