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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
(Loss) income before income taxes consisted of (in thousands):
Year Ended December 31,
202320222021
Domestic$(46,847)$(39,077)$72,758 
Foreign14,906 16,036 12,157 
(Loss) income before income taxes$(31,941)$(23,041)$84,915 
Income Tax Expense (Benefit)
Funko, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from FAH, LLC based upon Funko, Inc.’s economic interest held in FAH, LLC. FAH, LLC is treated as a pass-through partnership for income tax reporting purposes. FAH, LLC’s members, including the Company, are liable for federal, state and local income taxes based on their share of FAH, LLC’s pass-through taxable income (loss).
The components of the Company’s income tax expense (benefit) consisted of the following (in thousands):
Year Ended December 31,
202320222021
Current income taxes:
Federal
$5,574 $(4,766)$12,894 
State and local
71 1,629 1,825 
Foreign
3,728 2,750 2,703 
Current income taxes
$9,373 $(387)$17,422 
Deferred income taxes:
Federal
$105,236 $(11,227)$(185)
State and local
17,888 (5,945)(18)
Foreign
— (242)(158)
Deferred income taxes
123,124 (17,414)(361)
Income tax expense (benefit)$132,497 $(17,801)$17,061 
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 are as follows:
Year Ended December 31,
202320222021
Expected U.S. federal income taxes at statutory rate21.0 %21.0 %21.0 %
State and local income taxes, net of federal benefit(56.2)20.2 1.7 
Foreign taxes
(9.3)(9.9)2.5 
Foreign tax credit— 11.7 — 
Non-deductible expenses
(0.9)(2.1)(1.1)
Change in valuation allowance
(340.5)47.2 2.3 
Non-controlling interest
(6.8)2.6 (6.0)
Share-based compensation(1.6)(19.8)0.1 
Return to provision(23.8)4.9 1.5 
Other, net
3.3 1.5 (1.9)
Income tax expense(414.8)%77.3 %20.1 %
The Company’s annual effective tax rate in 2023 is different than the statutory rate of 21% due to the valuation allowance. The Company's annual effective tax rate for 2022 is different than the statutory rate of 21%, primarily due to a partial release of the valuation allowance, the limitation of future share based compensation pursuant to Section 162(m) of the Internal Revenue Code (the "Code"), and the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests. The Company's annual effective tax rate in 2021 was less than the statutory rate of 21%, primarily because the Company is not liable for income taxes on the portion of FAH, LLC’s earnings that are attributable to non-controlling interests.
Deferred Income Taxes
The significant items comprising deferred tax assets and liabilities is as follows (in thousands):
December 31,
20232022
Deferred tax assets:
Investment in partnership
$86,337 $93,923 
Tax receivable agreement liability2,150 26,860 
Stock-based compensation
6,790 5,402 
Foreign tax credit62 834 
Other carryforwards146 826 
Net operating loss carryforward34,867 — 
Gross deferred tax assets
130,352 127,845 
Valuation allowance
(130,352)(3,952)
Deferred tax assets, net of valuation allowance
— 123,893 
Deferred tax liabilities:
Property and equipment
(402)(382)
Gross deferred tax liabilities
(402)(382)
Net deferred tax assets$(402)$123,511 
The Company evaluates its ability to realize deferred tax assets on a quarterly basis and establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset may not be realized. During the year ended December 31, 2023, the Company determined that based on all the available evidence, including the Company’s three-year cumulative pre-tax loss position, it is not more likely than not that the results of operations will generate sufficient taxable income to realize its deferred tax assets. Consequently, the Company established a full valuation allowance of $123.2 million against its deferred tax assets, thus reducing the carrying balance to $0, and recognized a corresponding increase to tax expense in the consolidated statements of operations and comprehensive (loss) income in the year ended December 31, 2023. As of December 31, 2022, the Company recognized a deferred tax asset of $93.9 million, associated with the basis difference in its investment in FAH, LLC upon acquiring these LLC interests. However, a portion of the total basis difference will only reverse upon the eventual sale of its interest in FAH, LLC, which we expect would result in a capital loss. As of December 31, 2022, the Company has a valuation allowance in the amount of $4.0 million, against the deferred tax asset. The Company released $11.0 million valuation allowance during the year ended December 31, 2022, related to a discrete benefit on the outside basis deferred tax asset.
Uncertain Tax Positions
The Company regularly evaluates the likelihood of realizing the benefit from income tax positions that we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available. If the Company determines it is more likely than not that the position will be sustained, a benefit will be recognized at the largest amount that we believe is cumulatively greater than 50% likely to be realized.
There are no unrecognized tax benefits for uncertain tax positions for the three years ended December 31, 2023, 2022 and 2021.
Interest and penalties related to income tax matters are classified as a component of income tax expense (benefit). As of December 31, 2023, and 2022, we have not recorded any interest or penalties as the amounts were not material. Unrecognized tax benefits are recorded in other long-term liabilities on the consolidated balance sheets.
Other Matters
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to U.S. federal, state, and local income tax examinations by tax authorities for years after 2019 and subject to examination for all foreign income tax returns for fiscal 2023 and 2022. There were no open tax examinations at December 31, 2023.
Tax Receivable Agreement
The Company is party to the Tax Receivable Agreement with FAH, LLC and each of the Continuing Equity Owners and certain transferees of the Continuing Equity Owners that have been joined as parties to the Tax Receivable Agreement (such parties, "TRA Parties") that provides for the payment by the Company to the Continuing Equity Owners under certain circumstances. See Note 13, Liabilities under Tax Receivable Agreement.