Income Taxes

Malibu Boats, Inc. is taxed as a C corporation for U.S. income tax purposes and is therefore subject to both federal and state taxation at a corporate level. The LLC continues to operate in the United States as a partnership for U.S. federal income tax purposes.

In accordance with ASC Topic 740, Income Taxes, income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax liabilities and assets, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using the enacted statutory tax rates and are adjusted for any changes in such rates in the period of change. Malibu Boats, Inc. is taxed as a C Corporation, which is subject to both federal and state taxation at a corporate level. Therefore, tax expense and deferred tax assets and liabilities reflect such status. In November 2015, the FASB issued an update to their accounting guidance on income taxes that eliminates the current requirement for companies to present deferred income tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, companies are required to classify all deferred tax assets and liabilities as noncurrent. The Company early adopted this guidance as of the beginning of the fourth quarter of fiscal year 2016 on a retrospective basis. The application resulted in a reclassification of $629 for the fiscal year ended June 30, 2015 from current deferred tax asset to noncurrent on the consolidated balance sheet.

The components of provision for (benefit from) income taxes are as follows:



	Fiscal Year Ended June 30,
	2016			2015			2014
Current tax expense:
Federal	$	5,372		$	205		$	44
State	902			95			376
Foreign	351			430			14
Total Current	6,625			730			434
Deferred tax expense (benefit):
Federal	4,886			8,208			(2,066		)
State	458			(49		)	(588		)
Foreign	(168		)	(226		)	—
Total Deferred	5,176			7,933			(2,654		)
Income tax expense (benefit)	$	11,801		$	8,663		$	(2,220	)

The income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate to income from continuing operations before income taxes. The sources and tax effects of the differences are as follows:



	Fiscal Year Ended June 30,
	2016		2015		2014
Federal tax provision at statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	3.2		0.1		5.5
Permanent differences attributable to partnership investment	(0.4	)	1.6		(9.9	)
Non-controlling interest	(2.5	)	(9.8	)	36.5
Change in valuation allowance	1.3		—		—
Other, net	0.2		0.3		(1.9	)
Total income tax expense on continuing operations	36.8	%	27.2	%	65.2	%

The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiary operated as a limited liability company which was not subject to federal income tax. Accordingly, the portion of the Company’s subsidiary earnings attributable to the non-controlling interest are subject to tax when reported as a component of the non-controlling interests’ taxable income.

The components of the Company's net deferred income tax assets and liabilities at June 30, 2016 and 2015 are as follows:



	As of June 30,
	2016		2015
Deferred tax assets:
Litigation accrual	$	89	$	—
Partnership basis differences	121,942		118,188
Fixed assets and intangibles	58		144
Accrued liabilities and reserves	546		448
State tax credits and NOLs	1,059		388
Other	99		35
Total deferred tax assets	123,793		119,203
Deferred tax liabilities:
Fixed assets and intangibles	941		1,101
Other	39		—
Total deferred tax liabilities	980		1,101
Less valuation allowance	9,700		—
Total net deferred tax assets	$	113,113	$	118,102

In fiscal year 2015, the Company recorded $1,479 of net deferred tax liabilities in connection with the acquisition of Malibu Boats Pty Ltd. This net deferred tax liability represents the tax effects of fair value adjustments that were recorded with no corresponding adjustment to the tax basis of underlying assets and liabilities as the transaction was non-taxable.

On an annual basis, the Company performs a comprehensive analysis of all forms of positive and negative evidence to determine whether realizability of deferred tax assets is more likely than not. During each interim period, the Company updates its annual analysis for significant changes in the positive and negative evidence. At June 30, 2016, the Company concluded that $9,700 valuation allowance against deferred tax assets was necessary. The additional valuation allowance is due to state net operating losses generated by current and future amortization deductions (with respect to the Section 754 election) that are reported in the Tennessee corporate tax return without offsetting income, which is taxable at the LLC. The additional valuation allowance is due to the Company's determination that certain state NOL's will not be realizable.

Unrecognized tax benefits are discussed in the Company's accounting policy for income taxes (Refer to Note 1 on Income Taxes for more information). During the tax year ended June 30, 2015, a liability was established for unrecognized tax benefits through acquisition accounting. The Company has filed federal and state income tax returns that remain open to examination for years 2014 through 2015, while its subsidiaries, Malibu Boats Holdings, LLC and Malibu Boats Pty Ltd., remain open to examination for years 2012 through 2015.

A reconciliation of changes in the amount of unrecognized tax benefits for the fiscal years ended June 30, 2016 and 2015 is as follows:



	Fiscal Year Ended June 30,
	2016		2015		2014
Balance as of July 1	$	66	$	—	$	—
Additions based on tax positions taken during the current period	—		4		—
Additions based on tax positions taken during a prior period	—		62		—
Balance as of June 30	$	66	$	66	$	—

In fiscal year 2015, the Company recorded $62 and $4 in connection with uncertain tax positions taken by Malibu Boats Pty Ltd. in prior fiscal years and the current fiscal year, respectively, that would be payable by the Company if settled with the relevant tax authority. As of June 30, 2016, it is reasonably possible that none of the total unrecognized tax benefits recorded will reverse within the next 12 months. Of the total unrecognized tax benefits recorded on the balance sheet, $66 would impact the effective tax rate once settled.

The Company did not provide for U.S. federal income taxes or foreign withholding taxes in fiscal year 2016 on approximately $749 of undistributed earnings of its non-U.S. subsidiary, as such earnings were intended to be reinvested indefinitely. The estimated income and withholding tax liability associated with the remittance of these earnings is nominal.