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Income Taxes | 12 Months Ended
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Sep. 30, 2023
Income Tax Disclosure [Abstract] |
Income Taxes | INCOME TAXESi3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes.
| Year ended September 30,
| 2023 |  | 2022 |  | 2021
Current: |  |  |  |  |
Federal tax expense (benefit) | $ | 3,076 |  |  | $ | 1,098 |  |  | $ | (35) |
State tax expense | 1,656 |  |  | 1,321 |  |  | 945 |
Deferred: |  |  |  |  |
Federal tax benefit | (7,296) |  |  | (4,151) |  |  | (285) |
State tax expense (benefit) | 1,361 |  |  | 6,739 |  |  | (2) |
Income tax (benefit) expense | $ | (1,203) |  |  | $ | 5,007 |  |  | $ | 623 |
A reconciliation of income tax expense (benefit) from operations computed at the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year ended September 30,
| 2023 |  | 2022 |  | 2021
Expected U.S. federal income taxes at statutory rate | $ | (809) |  | 21.0 | % |  | $ | (3,824) |  | 21.0 | % |  | $ | (1,519) |  | 21.1 | %
Partnership income not taxed at federal level | 865 |  | (22.4) | % |  | 1,035 |  | (5.7) | % |  | 29 |  | (0.4) | %
Valuation allowance | (3,964) |  | 102.8 | % |  | 7,101 |  | (39.0) | % |  | 712 |  | (9.9) | %
State and local income taxes, net of federal benefit | 2,451 |  | (63.6) | % |  | (641) |  | 3.5 | % |  | 552 |  | (7.6) | %
Nondeductible expenses and other permanent items | 189 |  | (4.9) | % |  | 83 |  | (0.5) | % |  | 85 |  | (1.2) | %
Revaluation of debt and other debt transaction differences | 536 |  | (13.9) | % |  | 1,434 |  | (7.9) | % |  | 609 |  | (8.4) | %
Change in liability for uncertain tax positions | 155 |  | (4.0) | % |  | (25) |  | 0.1 | % |  | (83) |  | 1.2 | %
Federal tax credits | (636) |  | 16.5 | % |  | — |  | — | % |  | 240 |  | (3.3) | %
Other | 10 |  | (0.3) | % |  | (156) |  | 0.9 | % |  | (2) |  | — | %
Income tax (benefit) expense | $ | (1,203) |  | 31.2 | % |  | $ | 5,007 |  | (27.5) | % |  | $ | 623 |  | (8.6) | %
Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Net deferred taxes spanning multiple jurisdictions as of September 30, 2023 and 2022 were as follows:
| September 30,
| 2023 |  | 2022
Deferred tax assets: |  |  |
Investment in partnership | $ | 52,432 |  |  | $ | 56,388 |
Stock-based compensation | 13,144 |  |  | 2,421 |
Deferred revenue | 318 |  |  | 448 |
Accrued expenses | 328 |  |  | 269 |
Net operating loss carryforwards | 17,132 |  |  | 15,992 |
Section 163j carryforward | 5,064 |  |  | 1,685 |
Federal tax credits | 698 |  |  | 359 |
Operating lease liabilities | 611 |  |  | 677 |
Other | 108 |  |  | 75 |
Gross deferred tax assets | 89,835 |  |  | 78,314 |
Valuation allowance | (28,944) |  |  | (27,555) |
Deferred tax liabilities: |  |  |
Intangible assets | (26,313) |  |  | (14,270) |
Operating lease right of use assets | (565) |  |  | (641) |
Other | (1,145) |  |  | (285) |
Net deferred tax asset | $ | 32,868 |  |  | $ | 35,563 |
Federal net operating loss carryforwards as of September 30, 2023 and 2022 were $44,098 and $43,233, respectively. Federal tax credits were $698, resulting in a deferred tax asset of $9,959 as of September 30, 2023 compared to $359 of federal tax credits, resulting in a deferred tax asset of $9,438 as of September 30, 2022. The federal net operating loss carryforwards will begin to expire in 2037 and the federal tax credits will begin to expire in 2039. The use of federal net operating losses and credits are limited to the future taxable income of separate legal entities. As a result, a valuation allowance of $387 has been provided for certain federal deferred tax assets, a decrease of $421 during the year ended September 30, 2023. State net operating loss carryforwards as of September 30, 2023 totaled $124,656, resulting in a deferred tax asset of $7,871. The state net operating loss carryforwards will begin to expire in 2026. The use of certain state net operating losses are limited to future taxable earnings of separate legal entities. As a result, a valuation allowance of $8,511 has been provided for state loss carryforwards and other state tax attributes, an increase of $3,602 during the year ended September 30, 2023. The Company also considered a valuation allowance on its $52,432 outside basis of investment in i3 Verticals, LLC deferred tax asset as of September 30, 2023. The Company has recorded a valuation allowance of $20,046 against the portion of the deferred tax benefit that is capital in nature and against the amount not expected to be realized, resulting in a decrease in valuation allowance of $1,792 during the year ended September 30, 2023. Management believes that it is more likely than not that the results of operations will generate sufficient taxable income to realize the deferred tax assets after giving consideration to the valuation allowance. The components of the Company’s liability for uncertain tax benefits are as follows:
Gross unrecognized tax benefits as of September 30, 2021 | $ | 108 |
Increase in current year tax positions | — |
Increase in prior year tax positions | — |
Settlements and other reductions | 25 |
Gross unrecognized tax benefits as of September 30, 2022 | 83 |
Increase in current year tax positions | 108 |
Increase in prior year tax positions | 73 |
Settlements and other reductions | 26 |
Gross unrecognized tax benefits as of September 30, 2023 | $ | 238 |
As of September 30, 2023 and 2022, the Company had no accrued interest and no accrued penalties in either period related to uncertain tax positions. It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense. The Company is no longer subject to U.S. federal, state, or local examinations by tax authorities for years before 2019. As of September 30, 2023 and 2022, there were unrecognized tax benefits of $238 and $83 that if recognized would affect the annual effective tax rate. Tax Receivable Agreement On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15% of the tax benefits, if any, that the Company may realize. When Class B common stock is exchanged for Class A common stock, this triggers an increase in the tax basis of the Company's Common Units in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. During the year ended September 30, 2021, the Company acquired an aggregate of 1,671,479 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2021, the Company recognized an increase to its net deferred tax assets in the amount of $13,990, and corresponding Tax Receivable Agreement liabilities of $11,892, representing 85% of the tax benefits due to the Continuing Equity Owners. During the year ended September 30, 2022, the Company acquired an aggregate of 111,000 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2022, the Company recognized an increase to its net deferred tax assets in the amount of $898, and corresponding Tax Receivable Agreement liabilities of $763, representing 85% of the tax benefits due to the Continuing Equity Owners. During the year ended September 30, 2023, the Company acquired an aggregate of 24,748 common units of i3 Verticals, LLC in connection with the redemption of common units, which resulted in an increase in the tax basis of our investment in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. As a result of these exchanges, during the year ended September 30, 2023, the Company recognized an increase to its net deferred tax assets in the amount of $206, and corresponding Tax Receivable Agreement liabilities of $175, representing 85% of the tax benefits due to the Continuing Equity Owners. The deferred tax asset and corresponding Tax Receivable Agreement liability balances were $37,723 and $40,079, respectively, as of September 30, 2023. Payments to the Continuing Equity Owners related to exchanges through September 30, 2023 will range from $0 to $3,235 per year and are expected to be paid over the next 24 years. The amounts recorded as of September 30, 2023, approximate the current estimate of expected tax savings and are subject to change after the filing of the Company’s U.S. federal and state income tax returns. Future payments under the Tax Receivable Agreement with respect to subsequent exchanges would be in addition to these amounts.

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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://www.xbrl.org/2003/role/disclosureRef -Topic 946 -SubTopic 20 -Name Accounting Standards Codification -Section 50 -Paragraph 13 -Publisher FASB -URI https://asc.fasb.org//1943274/2147480990/946-20-50-13 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 235 -SubTopic 10 -Name Accounting Standards Codification -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480678/235-10-S99-1 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//740/tableOfContent Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 14 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482685/740-10-50-14 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 21 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482685/740-10-50-21 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 270 -Name Accounting Standards Codification -Section 50 -Paragraph 1 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482526/740-270-50-1 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 17 -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147482685/740-10-50-17 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -Publisher FASB -URI https://asc.fasb.org//1943274/2147479360/740-10-S99-1 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 10 -Name Accounting Standards Codification -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -Publisher FASB -URI https://asc.fasb.org//1943274/2147479360/740-10-S99-2 Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Topic 740 -SubTopic 30 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org//1943274/2147482603/740-30-50-2 + Details
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