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Income taxes | 9 Months Ended
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Sep. 30, 2024
Income Tax Disclosure [Abstract] |
Income taxes | Income taxes MediaAlpha, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from QLH based upon MediaAlpha, Inc.’s economic interest held in QLH. QLH is treated as a pass-through partnership for income tax reporting purposes and is not subject to federal income tax. Instead, QLH’s taxable income or loss is passed through to its members, including MediaAlpha, Inc. Accordingly, the Company is not liable for income taxes on the portion of QLH’s earnings not allocated to it. MediaAlpha, Inc. files and pays corporate income taxes for U.S. federal and state income tax purposes and its corporate subsidiary, Skytiger Studio, Ltd., is subject to taxation in Taiwan. The Company expects this structure to remain in existence for the foreseeable future. The Company estimates the annual effective tax rate for the full year to be applied to actual year-to-date income (loss) and adds the tax effects of any discrete items in the reporting period in which they occur. The following table summarizes the Company's income tax expense:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands, except percentages) |  | 2024 |  | 2023 |  | 2024 |  | 2023
Income (loss) before income taxes |  | $ | 12,200 |  |  | $ | (18,596) |  |  | $ | 15,286 |  |  | $ | (52,932) |
Income tax expense |  | $ | 312 |  |  | $ | 102 |  |  | $ | 469 |  |  | $ | 330 |
Effective Tax Rate |  | 2.6 | % |  | (0.5) | % |  | 3.1 | % |  | (0.6) | %
The Company's effective tax rate of 2.6% and 3.1% for the three and nine months ended September 30, 2024, respectively, and (0.5)% and (0.6)% for the three and nine months ended September 30, 2023, respectively, differed from the U.S. federal statutory rate of 21%, due primarily to the tax impacts of changes in valuation allowance. There were no material changes to the Company’s unrecognized tax benefits during the three and nine months ended September 30, 2024. The Company is currently under examination by various tax authorities in the United States. These examinations are in preliminary stages and the Company does not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year. During the three and nine months ended September 30, 2024, holders of Class B-1 units exchanged 0 and 6,496,800 Class B-1 units, respectively, together with an equal number of shares of Class B common stock, for shares of Class A common stock on a one-for-one basis (“Exchanges”). In connection with the Exchanges, the Company did not establish any additional liabilities related to the TRA, which are presented within additional-paid-in-capital in its consolidated statements of stockholders’ equity (deficit). In connection with the Exchanges and the changes to the carrying value of the non-controlling interest, the Company also recognizes deferred tax assets associated with the basis difference in its investment in QLH through additional-paid-in-capital, but during the three and nine months ended September 30, 2024, the Company did not recognize any additional deferred tax assets as the Company has recognized a full valuation allowance on its deferred tax assets. As of September 30, 2024 and December 31, 2023, the Company had a valuation allowance of $125.2 million and $95.1 million, respectively, against its deferred tax assets based on the recent history of pre-tax losses, which is considered a significant piece of objective negative evidence that is difficult to overcome and limits the ability to consider other subjective evidence, such as projections of future growth. Based on the significant improvement in the Company's pre-tax income for the nine months ended September 30, 2024 and the current forecasts, the Company expects that in the foreseeable future, which could be as early as the fourth quarter of 2024, there may be sufficient positive evidence, and/or that the objective negative evidence in the form of history of pre-tax losses will no longer be present, in which event the Company would be able to release a portion or all of the valuation allowance. Release of any amount of valuation allowance would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net income. Tax Receivables Agreement In connection with the Reorganization Transactions and the IPO, the Company entered into the TRA with Insignia, Senior Executives, and White Mountains. The Company expects to obtain an increase in its share of the tax basis in the net assets of QLH as Class B-1 units, together with shares of Class B common stock, are exchanged for shares of Class A common stock (or, at the Company’s election, redeemed for cash of an equivalent value). The Company intends to treat any redemptions and exchanges of Class B-1 units as direct purchases for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that it would otherwise pay in the future to various tax authorities. As of September 30, 2024 and December 31, 2023, the Company determined that making a payment under the TRA was not probable under ASC 450 — Contingencies since a valuation allowance has been recorded against the Company’s deferred tax assets. Accordingly, the Company has determined that the liabilities under the TRA were zero as of September 30, 2024 and December 31, 2023 in the consolidated balance sheets. In the event the Company generates taxable income for the current year, the Company would be required to recognize a portion or all of the liability under the TRA. If the Company had determined that generating sufficient future taxable income such that making a payment under the TRA was probable, it would have also recorded a liability pursuant to the TRA of approximately $121 million as of September 30, 2024 in the consolidated balance sheets. No payments were made pursuant to the TRA during the three and nine months ended September 30, 2024, and payments of $0 and $2.8 million were made during the three and nine months ended September 30, 2023, respectively.

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