Income Taxes
Components of the provision (benefit) for income taxes consist of the following:
|
| | | | | | | | | | | | |
| Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Current: | | | | | | |
Federal | | $ | 346,377 |
| | $ | (100,348 | ) | | $ | 94,835 |
|
State and local | | 225,674 |
| | (56,343 | ) | | 20,348 |
|
Total current expense (benefit) | | 572,051 |
| | (156,691 | ) | | 115,183 |
|
Deferred: | | |
| | |
| | |
|
Federal | | (754,310 | ) | | 4,357,687 |
| | (1,992,191 | ) |
State and local | | 9,532,049 |
| | 844,707 |
| | (246,619 | ) |
Total deferred provision (benefit) | | 8,777,739 |
| | 5,202,394 |
| | (2,238,810 | ) |
Income tax provision (benefit) | | $ | 9,349,790 |
| | $ | 5,045,703 |
| | $ | (2,123,627 | ) |
Prior to November 4, 2014, the Company had not been subject to U.S. Federal income taxes as the Predecessor was organized as a limited liability company. As a result of the Reorganization and IPO, the portion of Fifth Street Holdings income attributable to FSAM is now subject to U.S. Federal, state and local income taxes and is taxed at the prevailing corporate tax rates.
A reconciliation of the U.S. statutory income tax rate of 34% to the Company's effective tax rate is as follows:
|
| | | | | | | | | | | | |
| Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Provision at Federal statutory tax rate | | $ | 2,412,782 |
| | $ | 13,180,304 |
| | $ | 12,557,925 |
|
State and local taxes, net of federal benefit | | 131,554 |
| | 479,605 |
| | (116,882 | ) |
Change in tax status | | — |
| | — |
| | (1,089,600 | ) |
Income attributable to Predecessor and noncontrolling interests not subject to tax | | 43,388 |
| | (10,019,807 | ) | | (13,426,245 | ) |
Transfer pricing allocations (1) | | — |
| | 1,087,879 |
| | — |
|
Change in state tax rate and related adjustment to deferred tax asset | | 6,271,403 |
| | — |
| | — |
|
Other | | 490,663 |
| | 317,722 |
| | (48,825 | ) |
Income tax provision (benefit) | | $ | 9,349,790 |
| | $ | 5,045,703 |
| | $ | (2,123,627 | ) |
_____________
(1) As part of the Company's inter-company management agreements, certain expenses are allocated between flow through entities that are not subject to tax and corporate entities that are subject to taxation. The above expense allocations and the associated transfer pricing adjustments and reimbursements, had an impact on the overall effective tax rate reconciliation.
The Company's effective tax rate includes a rate benefit attributable to the fact that certain of the Company's subsidiaries operate as a series of pass-through entities which are not themselves subject to federal income tax. As a result of the Reorganization, certain subsidiaries were converted from pass-through entities to taxable entities. Accordingly, the portion of the Company's subsidiaries' earnings attributable to non-controlling interests are subject to tax when reported as a component of the non-controlling interests' taxable income on their individual tax returns.
As a result of certain changes to Connecticut state tax law that were passed in May 2016 (effective January 1, 2016), which resulted in a lower state income tax rate, the Company reduced its deferred tax assets by $8,843,122 during the year ended December 31, 2016, which includes a discrete adjustment of $6,271,403 recorded during the three months ended June 30, 2016, and is included in the provision for income taxes in the Consolidated Statements of Income.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and are reported in the accompanying Consolidated Statement of Financial Condition.
These temporary differences result in taxable or deductible amounts in future years. Details of the Company's deferred tax assets and liabilities are summarized as follows:
|
| | | | | | | | |
| | As of December 31, |
| | 2016 | | 2015 |
Deferred tax assets: | | |
| | |
|
Net operating loss carryforwards | | $ | 1,414,169 |
| | $ | 331,201 |
|
Reserves and accruals | | 2,585,280 |
| | 1,135,627 |
|
Share-based compensation | | 5,209,439 |
| | 2,373,219 |
|
Step-up related to purchase of interest in Fifth Street Holdings | | 40,078,291 |
| | 51,422,225 |
|
Other | | 828,533 |
| | 1,409 |
|
Total deferred tax assets | | 50,115,712 |
| | 55,263,681 |
|
Deferred tax liabilities: | | |
| | |
|
Property and equipment and other long-lived assets | | (877,161 | ) | | (1,918,267 | ) |
Unearned revenue | | (6,823,408 | ) | | (1,995,161 | ) |
Other | | — |
| | (132,296 | ) |
Total deferred liabilities | | (7,700,569 | ) | | (4,045,724 | ) |
Total net deferred tax assets | | $ | 42,415,143 |
| | $ | 51,217,957 |
|
Deferred tax assets are primarily the result of an increase in the tax basis of certain intangible assets resulting from FSAM's investment in Fifth Street Holdings. Net deferred tax assets are also recorded related to differences between the financial reporting basis and the tax basis of FSAM's proportionate share of the net assets of Fifth Street Holdings. Based on the Company's historical taxable income and its expected future earnings, management evaluates the uncertainty associated with booking tax benefits and determined that the deferred tax assets are more likely than not to be realized, including evaluation of deferred tax liabilities and the expectation of future taxable income.
As of December 31, 2016 and December 31, 2015, the Company had gross net operating loss carryforwards for Federal purposes of approximately $3.8 million and $0.5 million, respectively, portions of which begin to expire in 2034. Additionally, the Company had gross state net operating losses of $3.7 million and $0.5 million as of December 31, 2016 and 2015, respectively.
The Company and its subsidiaries file, or will file, income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. Fifth Street Holdings is not subject to federal income taxes as it is a flow-through entity. With respect to state and local jurisdictions, the Company and its subsidiaries are typically subject to examination for four to five years after the income tax returns have been filed.
The Company does not believe it has any significant uncertain tax positions. Accordingly, the Company did not record any adjustments or recognize interest expense for uncertain tax positions for the years ended December 31, 2016, 2015 and 2014. In the future, if uncertain tax positions arise, interest and penalties will be accrued and included in the Provision for Income Taxes.