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Income Taxes | 12 Months Ended
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Dec. 31, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | 21. Income Taxes The Company’s loss before income taxes of $273.5 million and $30.5 million during the years ended December 31, 2020 and 2019, respectively, consisted entirely of income earned in the United States. Income tax (benefit) expense for the years ended December 31, 2020 and 2019 consist of the following (in thousands):
|  | Year ended December 31, |
|  | 2020 |  |  | 2019 |
Current: |  |  |  |  |  |
Federal |  | $ | 1,112 |  |  | $ | 88 |
State |  |  | 951 |  |  |  | 312 |
Total current |  |  | 2,063 |  |  |  | 400 |
Deferred: |  |  |  |  |  |  |  |
Federal |  |  | (35,747 | ) |  |  | — |
State |  |  | (10,065 | ) |  |  | — |
Total deferred |  |  | (45,812 | ) |  |  | — |
Income tax (benefit) expense |  | $ | (43,749 | ) |  | $ | 400 |
Income tax (benefit) expense differs from that computed at the federal statutory corporate income tax rate as follows (in thousands):
|  | Year ended December 31, |
|  | 2020 |  |  | 2019 |
Tax benefit at Federal statutory rate |  | $ | (57,441 | ) |  | $ | (6,410 | )
State income tax provision (benefit), net of federal benefit |  |  | 499 |  |  |  | 3 |
Noncontrolling interest |  |  | (117 | ) |  |  | 1,754 |
Tax receivable agreement liability |  |  | (1,518 | ) |  |  | — |
Change in fair value – warrant liabilities |  |  | 50,537 |  |  |  | 3,894 |
Change in valuation allowance |  |  | (35,531 | ) |  |  | 1,088 |
Other |  |  | (178 | ) |  |  | 71 |
Income tax (benefit) expense |  | $ | (43,749 | ) |  | $ | 400 |
Deferred income taxes at December 31, 2020 and 2019 consisted of the following (in thousands):
|  | 2020 |  |  | 2019 |
Basis difference in Purple LLC investment |  | $ | 210,671 |  |  | $ | 34,384 |
Tax over book basis in capital contributions |  |  | 51,995 |  |  |  | 8,411 |
Start-up costs |  |  | 529 |  |  |  | 578 |
Accruals and reserves |  |  | 38 |  |  |  | 9 |
Net Operating Losses |  |  | 6 |  |  |  | 913 |
Total net deferred income tax asset |  |  | 263,239 |  |  |  | 44,295 |
Less: Valuation allowance |  |  | (51,995 | ) |  |  | (44,295 | )
Net deferred income tax asset (liability) |  | $ | 211,244 |  |  | $ | — |
The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and is included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP. As a result, the Company’s effective tax rate differs materially from the statutory rate. The primary factors impacting the expected tax are the allocation of tax benefit to noncontrolling interest and the impact of the valuation allowance. The Company has historically maintained a full valuation allowance on its net deferred tax assets which are comprised primarily of basis differences in Purple LLC. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to utilize the deferred tax assets on income tax returns. In prior years, management made the determination that its net deferred tax assets were not more likely than not going to be realized because the Company was in a three-year cumulative loss position and the generation of future taxable income was uncertain. Considering this and other factors, the Company had a full valuation allowance of $44.3 million as of December 31, 2019. During fiscal 2020, the Company achieved three-year cumulative income for the first time and determined that it would likely generate sufficient taxable income to utilize some of its deferred tax assets. Based on this and other positive evidence, the Company concluded it was more likely than not that some of its deferred tax assets would be realized and that a full valuation allowance for its deferred tax assets was no longer appropriate. As a result, $35.5 million of the valuation allowance associated with the Company’s federal and state deferred tax assets was released and recorded as an income tax benefit. In conjunction with the removal of some of the valuation allowance, the Company recorded an additional $218.9 million in deferred tax assets primarily related to tax basis increases resulting from exchanges of Class B Paired Securities during the year ended December 31, 2020. The deferred tax assets at December 31, 2020 are $211.2 million, which is net of $52.0 million of valuation allowance that has been recorded against the residual outside partnership basis for the amount the Company believes is not more likely than not realizable. As a result, there was an overall increase of $7.7 million in the valuation allowance from December 31, 2019 to December 31, 2020, primarily as a result of the increase in the residual outside partnership basis, partially offset by the removal of the valuation allowance on the other existing deferred tax assets. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act resulted in two adjustments to our income tax provision, relating to increased 2019 NOL utilization and tax benefits from NOL carrybacks. We have recorded $0.2 million in our income tax provision for the year ended December 31, 2020 related to the CARES Act. In connection with the Business Combination, the Company entered into the Tax Receivable Agreement with InnoHold, which provides for the payment by the Company to InnoHold of 80% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the Tax Receivable Agreement. As noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a TRA Liability may be recorded based on 80% of the estimated future cash tax savings that the Company may realize as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption. The amount of the increase in asset basis, the related estimated cash tax savings and the attendant TRA Liability to be recorded will depend on the price of the Company’s Class A Stock at the time of the relevant redemption or exchange. The estimation of liability under the TRA is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As a result of the initial merger transaction and the subsequent exchanges of 43.5 million Class B Units for Class A Stock as of December 31, 2020, the potential future TRA liability is $172.0 million, of which all has been recorded through the year ended December 31, 2020. Due to changes in estimates relating to the expected tax benefits associated with the liability under the Tax Receivable, the estimate of $172.0 million has been recorded to date ($0.5 million in 2019 and an incremental $171.5 million through December 31, 2020). Of the total liability recorded during 2020, $137.3 million relates to current year exchanges and was recorded as an adjustment to equity and $34.2 million was recorded to expense in order to re-establish the TRA related to prior year exchanges. The Company has no federal net operating loss (“NOL”) carryforwards after utilization of the remaining carryforwards in 2020. The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of December 31, 2020 and 2019, no uncertain tax positions were recognized as liabilities in the consolidated financial statements.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 + Details
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