Income Taxes

12 Months Ended

Jun. 30, 2020

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 statutory tax rate for each of fiscal years 2020 and 2019 was 21% as a result of the change in statutory rates. For fiscal year 2018, the Company recorded an increase 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act contains significant business tax provisions, including modifications to the rules limiting the deductibility of net operating losses (NOLs), expensing of qualified improvement property (QIP) and business interest in Internal Revenue Code Sections 172(a) and 163(j), respectively. The effects of the new legislation are recognized upon enactment. The Company did not recognize any significant impact to income tax expense for fiscal year 2020 relating to the CARES Act.

The components of provision for income taxes are as follows:


	Fiscal Year Ended June 30,
	2020		2019		2018
Current tax expense:
Federal	$	8,062	$	11,240	$	10,111
State	1,979		3,368		1,758
Foreign	378		725		756
Total current	10,419		15,333		12,625
Deferred tax expense:
Federal	7,849		5,336		51,358
State	917		1,609		(5,369)
Foreign	(109)		(182)		(196)
Total deferred	8,657		6,763		45,793
Income tax expense	$	19,076	$	22,096	$	58,418

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,
	2020		2019		2018
Federal tax provision at statutory rate	21.0	%	21.0	%	28.0	%
Change in federal statutory rate	—		—		36.2
State income taxes, net of federal benefit	2.9		4.4		3.9
Permanent differences attributable to partnership investment	(0.2)		(0.8)		(0.1)
Section 199 deductions	—		—		(1.2)
Non-controlling interest	(0.9)		(0.9)		(1.0)
Change in valuation allowance	—		—		(0.4)
Other, net	—		0.4		—
Total income tax expense on continuing operations	22.8	%	24.1	%	65.4	%

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, 2020 and 2019 are as follows:


	As of June 30,
	2020		2019
Deferred tax assets:

Partnership basis differences	$	61,650	$	69,632

Accrued liabilities and reserves	496		428
State tax credits and NOLs	5,004		3,902
Foreign tax credits	580		761
Acquisition costs	—		6
Other	275		337
Less valuation allowance	(14,582)		(14,252)
Total deferred tax assets	53,423		60,814
Deferred tax liabilities:

Fixed assets and intangibles	467		545
Other	35		7
Total deferred tax liabilities	502		552
Total net deferred tax assets	$	52,921	$	60,262

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, 2020 and 2019, the Company concluded that $14,582 and $14,252, 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 2035. This also includes a valuation allowance in the amount of $580 related to foreign tax credit carryforward that is not expected to be utilized in the future.

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 fiscal years 2017 through 2019, while its subsidiaries, Malibu Boats Holdings, LLC and Malibu Boats Pty Ltd., remain open to examination for fiscal years 2016 through 2019. The Company closed the IRS examination of its June 30, 2015 return during the fourth quarter of fiscal year 2019, resulting in an immaterial adjustment to its tax liability.

A reconciliation of changes in the amount of unrecognized tax benefits for the fiscal years ended June 30, 2020, 2019, 2018 is as follows:


	Fiscal Year Ended June 30,
	2020		2019		2018
Balance as of July 1	$	1,401	$	329	$	113
Additions based on tax positions taken during the current period	314		1,216		216
Reductions for settlements with taxing authorities	(93)		(144)		—
Reductions due to statute settlements	(64)		—		—
Reductions for tax positions of prior years	(113)		—		—
Balance as of June 30	$	1,445	$	1,401	$	329

In fiscal year 2020, the Company settled $93 related to its state tax filing positions. Also in fiscal year 2020, the Company reduced its uncertain tax positions $92 as a result of a method change filed in connection with inventory subject to Internal Revenue Code Sec. 263A, and recorded $203 in connection with its current year state filing positions. As of June 30, 2020, it is reasonably possible that $307 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, $1,226 would impact the effective tax rate once settled.

As discussed in Note 1 to the Consolidated Financial Statements, our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. At June 30, 2020, we had $231 of accrued interest related to unrecognized tax benefits.

The Company did not provide for U.S. federal, state income taxes or foreign withholding taxes in fiscal year 2020 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.