Annual report [Section 13 and 15(d), not S-K Item 405]

Income Taxes

v3.25.0.1
Income Taxes
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
Income Taxes
23. Income Taxes
The provision (benefit) for income taxes related to continuing operations consisted of the following (in thousands):
For the year ended December 31, 2024 For the year ended December 31, 2023
Current expense (benefit)
Federal $ (13) $ 85 
Deferred expense (benefit)
Federal 2,010  (508)
State 401  (170)
Subtotal 2,411  (678)
Provision (benefit) for income taxes $ 2,398  $ (593)
The following table presents a reconciliation of the applicable statutory U.S. federal income tax rate to the effective tax rate (dollars in thousands):
For the year ended December 31, 2024 For the year ended December 31, 2023
Tax provision (benefit) at federal statutory rate $ 8,991  $ (35,037)
Effect of:
Noncontrolling interest (4,373) 21,834 
Permanent differences 513  1,036 
State taxes 401  (225)
Valuation allowance (2,458) 13,042 
Other tax adjustments (676) (1,243)
Provision (benefit) for income taxes $ 2,398  $ (593)
Effective tax rate 5.60  % 0.36  %

The effective tax rate is calculated by dividing the provision (benefit) for income taxes by net income (loss) from continuing operations before income taxes. The Company’s effective tax rate on continuing operations for the year ended December 31, 2024 differs from the U.S. federal statutory rate primarily due to income attributable to noncontrolling interests, state statutory income tax rates, and the impact of discrete tax items, which includes a $2.5 million benefit associated with a valuation allowance previously recorded against deferred tax assets, including NOL carryforwards and other deferred tax assets.
The Company’s effective tax rate on continuing operations for the year ended December 31, 2023 differs from the U.S. federal statutory rate primarily due to income attributable to noncontrolling interests, state statutory income tax rates, and the impact of discrete tax items, which includes a $13.0 million charge associated with the recording of a valuation allowance against deferred tax assets, including NOL carryforwards and other deferred tax assets.
FOA is taxed as a corporation and is subject to U.S. 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 it generates. FOA Equity and its disregarded subsidiaries, collectively, 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 U.S. federal, state, and local income taxes based on their allocable share of FOA Equity’s pass-through taxable income.
In 2023, there were certain FOA Equity wholly-owned corporate subsidiaries that were regarded entities for tax purposes and subject to U.S. federal, state, and local taxes on income they generated. As such, the consolidated tax provision of FOA included corporate taxes that it incurred based on its flow-through income from FOA Equity, as well as corporate taxes that were 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. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences attributable to those temporary differences and the expected benefits of net operating losses and carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows (in thousands):
December 31, 2024 December 31, 2023
Deferred tax assets
Loss carryforwards $ 41,410  $ 37,272 
Research and development tax credits 1,482  1,446 
Earnout awards 5,025  5,099 
TRA 836  1,161 
Other 177  316 
Gross deferred tax assets 48,930  45,294 
Valuation allowance (38,454) (42,365)
Deferred tax assets, net of valuation allowance 10,476  2,929 
Deferred tax liabilities
Investment in FOA Equity 13,095  3,137 
Gross deferred tax liabilities 13,095  3,137 
Net deferred tax liability $ (2,619) $ (208)

The federal and state NOL carryforwards amount to $164.1 million and $145.6 million at December 31, 2024 and December 31, 2023, respectively. It is expected that these NOL’s will not expire.
A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent results of operations. As of December 31, 2024, due to current year operating results and forecasted taxable income or losses, management has maintained their assessment that the existing taxable temporary differences that will reverse through the course of ordinary business will not more-likely-than-not generate sufficient taxable income to utilize the current attributes. Therefore, a valuation allowance for the deferred tax asset in excess of deferred tax liabilities has been maintained. Management also determined that the future sources of taxable income from reversing temporary differences that comprise the investment in FOA Equity deferred tax liability would only be fully realized upon sale of FOA’s interest in FOA Equity. Accordingly, the deferred tax liability from investment in FOA Equity has been treated as an indefinite-lived intangible and is limited by the federal net operating loss utilization rules. The net change in the valuation allowance was $3.9 million and $17.7 million for the years ended December 31, 2024 and 2023, respectively. Furthermore, $1.2 million and $3.3 million of decreases in the valuation allowance associated with transactions with noncontrolling interests in the years ended December 31, 2024 and 2023, respectively, are offset to additional paid-in capital.
Net deferred tax liabilities are included in accrued and other liabilities, which is part of Payables and other liabilities in the Consolidated Statements of Financial Condition.
Tax positions taken in tax years that remain open under the statute of limitations will be subject to examinations by tax authorities. With few exceptions, the Company is no longer subject to state or local examinations by tax authorities for tax years ended December 31, 2020 or prior.
The Company’s unrecognized tax benefits, excluding related interest and penalties, were (in thousands):
For the year ended December 31, 2024 For the year ended December 31, 2023
Unrecognized tax benefits—beginning of period $ 421  $ 307 
Increases on tax positions related to the current period 47  114 
Decreases on tax positions related to prior periods (31) — 
Unrecognized tax benefits—end of period $ 437  $ 421 

If recognized, the entire amount of the tax benefits disclosed above would reduce the Company’s annual effective tax rate. FOA does not believe that it will have a material increase or decrease in its unrecognized tax benefits during the coming year.