Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC"), or a “C-Corporation”. As such, the entities functioning as LLCs are not liable for or able to benefit from U.S. federal and most state income taxes on their earnings, and earnings (losses) will be included in the personal income tax returns of each entity’s unit holders. The entities functioning as C-Corporations are liable for or able to benefit from U.S. federal, state and local income taxes on their earnings and losses, respectively.
On December 22, 2017, the President of the United States signed into law U.S. tax reform which reduces the federal corporate income tax rate from 35% to 21%, among other things. As of December 31, 2017, the Company has not completed the accounting for the tax effects of the enactment of U.S. tax reform; however, has made a reasonable estimate, in accordance with the rules issued by the SEC Staff Accounting Bulletin No. 118 (“SAB 118”). The Company has recognized provisional tax impacts related to the revaluation of the Company's net deferred tax assets of approximately $16.5 million. As a result, the Company decreased its deferred tax asset related to the TRA, resulting in a $12.9 million reduction of the liability, representing 85% of the applicable cash savings. The other changes related to U.S. tax reform do not have a material impact on the consolidated financial statements. The accounting is expected to be completed when the U.S. corporate income tax return is filed in 2018.
Components of the provision for income taxes consist of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current | | | | | |
Federal | $ | 556 |
| | $ | 2,797 |
| | $ | 4,525 |
|
State and local | 184 |
| | 816 |
| | 780 |
|
Current tax expense | 740 |
| | 3,613 |
| | 5,305 |
|
Deferred | | | | | |
Federal | 16,137 |
| | 4,543 |
| | (618 | ) |
State and local | 2,475 |
| | 218 |
| | (48 | ) |
Deferred tax expense (benefit) | 18,612 |
| | 4,761 |
| | (666 | ) |
Provision for income tax expense | $ | 19,352 |
| | $ | 8,374 |
| | $ | 4,639 |
|
The differences between income taxes computed using the U.S. federal income tax rate of 34% for the years ended December 31, 2017 and 2016 and 35% for the year ended December 31, 2015 and the provision for income taxes for continuing operations are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Amount computed using the statutory rate | $ | 23,078 |
| | $ | 30,866 |
| | $ | 42,557 |
|
Increase (reduction) in taxes resulting from: | | | | | |
State and local taxes, including settlements and adjustments, net of federal benefit | 408 |
| | 835 |
| | 689 |
|
Impact of enacted tax law changes | 16,512 |
| | — |
| | — |
|
Net adjustment to deferred tax asset | — |
| | 1,901 |
| | (3,247 | ) |
Net adjustment to amounts payable under TRA | (4,372 | ) | | (522 | ) | | 983 |
|
Benefit from the flow-through entities | (15,163 | ) | | (24,723 | ) | | (36,265 | ) |
Other, net | (1,111 | ) | | 17 |
| | (78 | ) |
Provision for income taxes | $ | 19,352 |
| | $ | 8,374 |
| | $ | 4,639 |
|
The provision for income taxes includes a benefit attributable to the fact that the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate level taxes. This favorable impact is offset by the enactment of U.S. tax reform, which resulted in a $16.5 million provision due to the revaluing of the Company’s net deferred tax assets that was partially offset by the changes in the tax receivable agreement and the corresponding decrease in the payment of such tax benefit. For the year ended December 31, 2016, the Company recognized a $1.9 million provision for the reduction in its effective tax rate. For the year ended December 31, 2015, the Company received a benefit of approximately $3.2 million resulting from the release of uncertain tax positions that increased the future tax benefits under the tax receivable agreement.
Deferred Tax Assets and Liabilities
As a result of Manning & Napier's purchase of Class A units of Manning & Napier Group or exchange for Class A common stock of Manning & Napier for Class A units of Manning & Napier Group and Manning & Napier Group's election under Section 754 of the Internal Revenue Code, the Company expects to benefit from depreciation and amortization deductions from an increase in tax basis of tangible and intangible assets of Manning & Napier Group. Those deductions allocated to the Company will be taken into account in reporting the Company's taxable income.
In connection with the IPO, a tax receivable agreement ("TRA") was entered into between Manning & Napier and the holders of Manning & Napier Group, pursuant to which Manning & Napier is required to pay to such holders 85% of the applicable cash savings, if any, in U.S. federal, state, local and foreign income tax that Manning & Napier actually realizes, or is deemed to realize in certain circumstances, as a result of (i) certain tax attributes of their units sold to Manning & Napier or exchanged (for shares of Class A common stock) and that are created as a result of the sales or exchanges and payments under the TRA and (ii) tax benefits related to imputed interest.
Under the TRA, Manning & Napier generally will retain the benefit of the remaining 15% of the applicable tax savings. There is a possibility that not all of the 85% of the applicable cash savings will be paid to the selling or exchanging holder of Class A units. If it is determined that all or a portion of such applicable tax savings is in doubt, payment to such holders of Class A units will be the amount attributable to the portion of the applicable tax savings that are determined not to be in doubt and the payment of the remainder at such time as it is reasonably determined that the actual tax savings or that the amount is no longer in doubt.
At December 31, 2017 and 2016, the Company had recorded a total liability of approximately $21.8 million and $37.1 million, respectively, representing the payments due to the selling unit holders under the TRA. Of these amounts, approximately $2.5 million and $2.4 million were included in accrued expenses and other liabilities at December 31, 2017 and 2016, respectively. Payments are anticipated to be made annually commencing from the date of each event that gives rise to the TRA benefits. The timing of the payments is subject to certain contingencies including the Company having sufficient taxable income to utilize all of the tax benefits defined in the TRA. The Company made payments pursuant to the TRA of approximately $2.4 million, $3.4 million and $2.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Components of net deferred tax assets consist of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Deferred tax assets | | | |
Tax receivable agreement | $ | 22,680 |
| | $ | 40,834 |
|
Bonus and commissions | 641 |
| | 910 |
|
Other | 197 |
| | 345 |
|
Total deferred tax assets | 23,518 |
| | 42,089 |
|
Deferred tax liabilities | | | |
Depreciation and amortization | 131 |
| | 51 |
|
Prepaid items | 89 |
| | 133 |
|
Total deferred tax liabilities | 220 |
| | 184 |
|
Net deferred tax assets | $ | 23,298 |
| | $ | 41,905 |
|
As of December 31, 2017, the Company had no available net operating loss carryforwards for income tax purposes.
The Company has assessed the recoverability of the deferred tax assets and believes it is more likely than not that the assets will be realized. The Company has not recorded a valuation allowance as of December 31, 2017 and 2016.
Accounting for Uncertainty in Income Taxes
A reconciliation of the beginning and ending amount of the Company's liability for income taxes associated with unrecognized tax benefits is as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (in thousands) |
Balance as of January 1, | $ | 135 |
| | $ | 6 |
|
Increase related to current year tax positions | 27 |
| | 129 |
|
Decrease related to prior year tax positions | (129 | ) | | — |
|
Balance as of December 31, | $ | 33 |
| | $ | 135 |
|
The Company’s policy regarding interest and penalties related to uncertain tax positions is to recognize such items as a component of the provision for income taxes. The Company recorded less than $0.1 million in interest and penalties in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015.
The Company does not expect that changes in the liability for unrecognized tax benefits during the next twelve months will have a significant impact on the Company's financial position or results of operations.
The Company files income tax returns with Federal, state and local jurisdictions. The Company’s U.S. Federal and state tax matters for the years 2014 through 2016 remain subject to examination by the respective tax authorities.