Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes
31. Income Taxes
The provision (benefit) for income taxes consists of the following (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
April 1, 2021

to

December 31, 2021
     
January 1, 2021

to

March 31, 2021
     
For the year ended
December 31, 2020
     
For the year ended
December 31, 2019
  
    
Successor
     
Predecessor
  
Current expense:
                                    
Federal
   
$
2,757
 
   
$
 979
 
    $ 2,197      $ 860  
State
   
 
319
 
   
 
 286
 
      378        185  
    
 
 
     
 
 
 
   
 
 
     
 
 
  
Subtotal
   
 
3,076
 
   
 
 1,265
 
      2,575        1,045  
Deferred expense (benefit)
            
 
  
 
                  
Federal
   
 
(19,259
) 
   
 
 (110
)
      22        (79 ) 
State
   
 
(4,488
) 
   
 
 (18
)
      (253 )       (17 ) 
    
 
 
     
 
 
 
   
 
 
     
 
 
  
Subtotal
   
 
(23,747
) 
   
 
 (128
)
      (231 )       (96 ) 
    
 
 
     
 
 
 
   
 
 
     
 
 
  
Provision (
b
enefit)
   
$
(20,671
) 
   
$
 1,137
 
    $ 2,344      $ 949  
    
 
 
     
 
 
 
   
 
 
     
 
 
  
 
 
The following table presents a reconciliation of the applicable statutory U.S. federal income tax rate to the effective tax rate (dollars in thousands):
 
 
  
April 1, 2021

to

December 31, 2021
 
  
January 1, 2021

to

March 31, 2021
 
 
For the year ended
December 31, 2020
 
 
For the year ended
December 31, 2019
 
 
  
Successor
 
  
Predecessor
 
Tax expense at federal statutory rate
   
$
(277,551
) 
   
$
 26,348
 
   $ 105,054     $ 16,292  
Effect of:
            
 
 
 
                
NonControlling Interest
   
 
196,138
 
   
 
 (25,535
) 
     (103,819 )      (13,933 ) 
Permanent differences
   
 
(707
) 
   
 
—  
 
     540       (356 ) 
Goodwill impairment
   
 
67,902
 
   
 
—  
 
     —         —    
State taxes
   
 
(4,096
) 
   
 
 268
 
     (367 )      230  
Other tax adjustments
   
 
(2,357
) 
   
 
 56
 
     936       (1,284 ) 
    
 
 
     
 
 
 
  
 
 
    
 
 
  
Provision (
b
enefit)
   
$
(20,671
) 
   
$
 1,137
 
   $ 2,344     $ 949  
    
 
 
     
 
 
 
  
 
 
    
 
 
  
Effective Tax Rate
   
 
1.56
% 
   
 
 0.91
%
     0.47 %      1.22 % 
The effective income tax rate is calculated by dividing the (benefit) provision for income taxes by net income (loss) before income taxes. The effective income tax rate for the Successor period differs from the statutory rate primarily due to income attributable to noncontrolling interests and the impairment of book goodwill recorded during the period.
The effective income tax rate for the Predecessor periods differs from the statutory rate primarily due to the business operating as a flowthrough entity which was not subject to U.S. federal and state income taxes.
FoA is taxed as a corporation and is subject to corporate federal, state and local taxes on the income allocated to it from FoA Equity, based upon FoA’s economic interest in FoA Equity, as well as any stand-alone income or loss it generates. FoA Equity and its disregarded subsidiaries are treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, FoA Equity is not subject to U.S. federal and certain state and local income taxes. FoA Equity’s members, including FoA, are liable for federal, state and local income taxes based on their allocable share of FoA Equity’s pass-through taxable income, which includes income of certain disregarded corporate subsidiaries for tax purposes.
FoA Equity wholly owns certain regarded corporate subsidiaries for tax purposes. FoA Equity’s regarded corporate subsidiaries are subject to corporate federal, state and local taxes on income they generate. As such, the consolidated tax provision of FoA addresses corporate taxes that it incurs based on its flow-through income from FoA Equity as well as corporate taxes that are incurred by its regarded subsidiaries.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes.
 
Significant components of the Company’s deferred income tax assets (liabilities) are as follows (in thousands):
 
 
  
December 31,
 
 
December 31,
 
 
  
2021
 
 
2020
 
Deferred tax assets
  
      
 
      
Loss carryforwards
   
$
8,765
 
   $ 483  
Research and development tax credits
   
 
172
 
     —    
TRA
 
 
 
9,107
 
 
 
—
 
Capital lease amortization
   
 
—  
 
     438  
Payroll and employee benefits
   
 
—  
 
     121  
Estimate of claim losses
   
 
—  
 
     142  
Other
   
 
—  
 
     25  
    
 
 
    
 
 
  
Gross deferred tax assets
   
 
18,044
 
     1,209  
Valuation allowance
   
 
(777
) 
     (160 ) 
    
 
 
    
 
 
  
Deferred tax assets, net of valuation allowance
   
 
17,267
 
     1,049  
    
 
 
    
 
 
  
Deferred tax liabilities
                 
Investment in FoA Equity
   
 
35,345
 
     —    
Depreciation and amortization
   
 
—  
 
     843  
Loss reserves
   
 
—  
 
     186  
Other
   
 
503
 
     307  
    
 
 
    
 
 
  
Gross deferred tax liabilities
   
 
35,848
 
     1,336  
    
 
 
    
 
 
  
Net deferred tax liability
   
$
(18,581
) 
   $ (287 ) 
    
 
 
    
 
 
  
The increase in the deferred tax asset balance from the prior year end is primarily a result of the Business Combination. The Company recognized a deferred tax liability (“DTL”) to account for the difference between the Company’s book and tax basis in its investment in FoA Equity.
The federal and state net operating loss (“NOL”) carryforwards amount to approximately $34.4 million and $2.9 million at December 31, 2021 and 2020, respectively. It is expected that these NOL’s will not expire.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Net deferred tax liabilities are included in payables and other liabilities in the Consolidated Statements of Financial Condition.
FoA and its underlying entities files their tax returns as prescribed by the tax laws of the jurisdictions in which they operate. In the normal course of business, FoA is subject to examination by U.S. federal and certain state, local and foreign tax regulators. As of December 31, 2021, the Company’s U.S. federal income tax returns for the years 2018 through 2020 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2016 through 2020.
 
 
The Company’s unrecognized tax benefits, excluding related interest and penalties, were (in thousands):
 
 
  
April 1, 2021

to

December 31, 2021
 
  
January 1, 2021

to

March 31, 2021
 
  
For the year ended
December 31, 2020
 
 
For the year ended
December 31, 2019
 
 
  
Successor
 
  
Predecessor
 
Unrecognized tax benefits—beginning of period
   
$
576
 
   
$
 576      $ 471     $ 471  
Increases on tax positions related to the current period
     
104
 
   
 
 —
  
        32       —    
(Decreases) increases on tax positions related to prior periods

   
 
(28
) 
   
 
—  
        543         —  
Statutes closing
   
 
—  
 
   
 
—  
        (470 )         
    
 
 
     
 
 
     
 
 
    
 
 
  
Unrecognized tax benefits—end of period
   
$
652
 
   
$
 576      $ 576     $ 471  
    
 
 
     
 
 
     
 
 
    
 
 
  
If recognized, the entire amount of the tax benefits disclosed above, would reduce the annual effective rate. FoA does not believe that it will have a material increase or decrease in its unrecognized tax benefits during the coming year.