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.

Income taxes are computed in accordance with ASC Topic 740, Income Taxes , and reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, such deferred tax assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made.

On December 22, 2017, the Tax Act was enacted which, among a number of its provisions, lowered the U.S. corporate tax rate from 35% to 21% , effective January 1, 2018. The Company's blended statutory tax rate for fiscal year 2018 will approximate 28% as a result of the change in statutory rates. For fiscal year 2018, we recorded a non-cash adjustment to income tax expense of $44,500 for the remeasurement of deferred taxes on the enactment date and the deferred tax impact related to the reduction in the tax receivables agreement liability.

The components of provision for income taxes are as follows:



	Fiscal Year Ended June 30,
	2018			2017			2016
Current tax expense:
Federal	$	10,111		$	6,094		$	5,372
State	1,758			1134			902
Foreign	756			788			351
Total Current	12,625			8,016			6,625
Deferred tax expense:
Federal	51,358			9,132			4,886
State	(5,369		)	615			458
Foreign	(196		)	(170		)	(168		)
Total Deferred	45,793			9,577			5,176
Income tax expense	$	58,418		$	17,593		$	11,801

The income tax expense 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,
	2018		2017		2016
Federal tax provision at statutory rate	28.0	%	35.0	%	35.0	%
Change in federal statutory rate	36.2		—		—
State income taxes, net of federal benefit	3.9		3.4		3.2
Permanent differences attributable to partnership investment	(0.1	)	0.4		(0.4	)
Section 199 deductions	(1.2	)	(1.4	)	—
Non-controlling interest	(1.0	)	(1.9	)	(2.5	)
Change in valuation allowance	(0.4	)	1.1		1.3
Other, net	—		(0.4	)	0.2
Total income tax expense on continuing operations	65.4	%	36.2	%	36.8	%

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, 2018 and 2017 are as follows:



	As of June 30,
	2018			2017
Deferred tax assets:
Partnership basis differences	$	73,812		$	115,599
Fixed assets and intangibles	5			8
Accrued liabilities and reserves	391			348
State tax credits and NOLs	2,938			1,712
Acquisition costs	—			10
Other	35			51
(Less) valuation allowance	(12,716		)	(10,324		)
Total deferred tax assets	64,465			107,404
Deferred tax liabilities:
Fixed assets and intangibles	687			850
Other	14			18
Total deferred tax liabilities	701			868
Total net deferred tax assets	$	63,764		$	106,536

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, 2018 and 2017, the Company concluded that $12,716 and $10,324, respectively, of valuation allowance against deferred tax assets was necessary. The Company continues to record the valuation allowance on 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. These net operating losses have a 15 year carryover and will expire, if unused, between 2030 and 2032.

Unrecognized tax benefits are discussed in the Company's accounting policy for income taxes (Refer to Note 1 on Income Taxes for more information). The Company has filed federal and state income tax returns that remain open to examination for years 2015 through 2017, while its subsidiaries, Malibu Boats Holdings, LLC and Malibu Boats Pty Ltd., remain open to examination for years 2014 through 2017. The Company is currently undergoing an Internal Revenue Service ("IRS") examination of its June 30, 2015 return which began in the fourth quarter of fiscal 2017, which the Company hopes to complete by the first half of fiscal 2019. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits described below is adequate.

A reconciliation of changes in the amount of unrecognized tax benefits for the fiscal years ended June 30, 2018, 2017, 2016 is as follows:



	Fiscal Year Ended June 30,
	2018		2017		2016
Balance as of July 1	$	113	$	66	$	66
Additions based on tax positions taken during the current period	216		47		—
Balance as of June 30	$	329	$	113	$	66

In fiscal year 2018, the Company recorded $131 in connection with inventory subject to Internal Revenue Code Sec. 263A identified during an IRS examination. 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 fiscal year 2015, respectively, that would be payable by the Company if settled with the relevant tax authority. As of June 30, 2018, it is reasonably possible that $131 of the total unrecognized tax benefits recorded will reverse within the next twelve months. Of the total unrecognized tax benefits recorded on the balance sheet, $317 would impact the effective tax rate once settled.

The Company did not provide for U.S. federal, state income taxes or foreign withholding taxes in fiscal year 2018 on the outside basis difference of its non-U.S. subsidiary, as such foreign earnings are considered to be permanently reinvested. The estimated income and withholding tax liability associated with the remittance of these earnings is nominal.