Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The taxable results of the Company’s operations are included in the consolidated income tax returns of Cowen Inc. as well as stand-alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand-alone or combined basis. These subsidiaries are subject to tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries with tax filing obligations are the United Kingdom, Luxembourg, Malta, Germany, Switzerland, South Africa, Canada and Hong Kong.

The Company is subject to U.S. tax on its Global Intangible Low-Taxed Income ("GILTI"). The Company elected to account for taxes on GILTI inclusions in U.S. taxable income as incurred on the current year basis and not included any related amounts in deferred taxes.

The components of the Company's income tax expense for the years ended December 31, 2021, 2020 and 2019 are as follows:

	Year ended December 31,
	2021		2020		2019
	(dollars in thousands)
Current tax expense/(benefit)
Federal	$	92,390	$	13,840	$	(731)
State and local	21,842		5,060		457
Foreign	1,867		1,355		1,831
Total	$	116,099	$	20,255	$	1,557
Deferred tax expense/(benefit)
Federal	$	(10,163)	$	53,231	$	10,242
State and local	(4,861)		17,337		3,598
Foreign	964		(450)		(544)
Total	(14,060)		70,118		13,296
Total tax expense/(benefit)	$	102,039	$	90,373	$	14,853

Consolidated U.S. income/(loss) before income taxes was $385.1 million in 2021, $289.6 million in 2020, and $68.9 million in 2019. The corresponding amounts for non-U.S.-based income/(loss) were $20.9 million in 2021, $7.9 million in 2020, and $2.2 million in 2019.

The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended December 31, 2021, 2020, and 2019 are as follows:

	Year ended December 31,
	2021		2020		2019
Pre-tax net income at U.S. statutory rate	21.0	%	21.0	%	21.0	%
Nondeductible expenses	2.6		1.5		4.1
State and foreign tax	5.0		7.3		8.0
Reversal of income attributable to non-controlling interests	(0.4)		0.7		(9.2)
Other, net	(3.1)		(0.1)		(2.9)
Total	25.1	%	30.4	%	21.0	%

As of December 31, 2021, the Company has net income taxes receivable of approximately $5.0 million representing state and foreign tax overpayments, which is included in other assets on the accompanying consolidated statements of financial condition. The Company also has income taxes payable of approximately $16.6 million representing federal and foreign payables, which is included in other liabilities on the accompany consolidated statements of financial condition.

The components of the Company's deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows:

	As of December 31,
	2021		2020
	(dollars in thousands)
Deferred tax assets, net of valuation allowance
Net operating loss	$	14,649	$	18,039
Deferred compensation	34,342		24,068
Tax credits	3,241		6,230
Lease liability	24,373		20,401
Other	7,134		7,371
Total deferred tax assets	83,739		76,109
Valuation allowance	(4,226)		(5,194)
Deferred tax assets, net of valuation allowance	79,513		70,915
Deferred tax liabilities
Right-of-use on certain assets	(22,568)		(19,443)
Unrealized gains on investments	(30,393)		(33,439)
Other	(4,787)		(9,003)
Total deferred tax liabilities	(57,748)		(61,885)
Deferred tax assets/(liabilities), net	$	21,765	$	9,030

Deferred tax assets, net of valuation allowance, are reported in the accompanying consolidated statements of financial condition. In addition to the deferred tax balances in the table above, the Company records balances related to its operating losses in Luxembourg, which are discussed below.

The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management’s view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized for tax purposes in the foreseeable future. The Company recorded approximately $4.2 million valuation allowance against its deferred tax assets of $83.7 million as of December 31, 2021 and recorded approximately $5.2 million valuation allowance against its deferred tax assets of $76.1 million as of December 31, 2020. Separately, the Company has deferred tax liabilities of $57.7 million as of December 31, 2021 and $61.9 million as of December 31, 2020.

For tax year 2021, the Company's total deferred tax benefit of $14.1 million was derived by the reversal of timing differences in the normal course of business. The deferred tax expense of $70.1 million in 2020 was derived by the utilization of net operating losses and the reversal of timing differences in the normal course of business. The deferred tax expense of $13.3 million in 2019 was derived by the reversal of timing differences in the normal course of business.

As of December 31, 2021, the Company has foreign tax credit carryforwards of $3.2 million which expire between 2022 and 2029. Valuation allowance of $3.1 million was established against foreign tax credit carryforward as the Company determined that it is not more likely than not that the credits will be utilized.

The Company has the following net operating loss carryforwards at December 31, 2021:

Jurisdiction:	Federal	New York State	New York City	Hong Kong
Net operating loss (in millions)	$16.9	$31.9	$64.5	$13.3
Year of expiration	2030	2034	2034	Indefinite

In addition to the net operating loss carryforwards in the table above, the Company also has net operating loss carryforwards in Luxembourg. These loss carryforwards are only accessible to the extent of taxable income generated by the Luxembourg reinsurance companies, including any deferred income that will be generated in the future. Consequently, the Company recorded a deferred tax asset of $130.6 million, net of deferred tax liabilities of $76.5 million in connection with future taxable income, and an offsetting valuation allowance of $130.6 million against its Luxembourg net operating loss carryforwards that are in excess of such taxable income.

In June 2011, the Company acquired a subsidiary with net operating loss carryovers that underwent a change of control under Section 382 of the Internal Revenue Code due to the acquisition. Accordingly, a portion of the Company’s deferred tax assets, are subject to an annual limitation under Section 382. The deduction limitation is approximately $6.7 million annually and applies to approximately $16.9 million of net operating losses. The Company is not expected to lose any deferred tax assets due to these limitations.

As a result of the enactment of the American Rescue Plan Act signed on March 11, 2021, the Company is required to assess the tax impact of the Act in the quarter the law was enacted. Based on management’s analysis, there was no material impact on the Company's financial statements as of December 31, 2021.

The components of unrecognized tax benefits are as follows:

	As of December 31,
	2021		2020
	(dollars in thousands)
Beginning balance at January 1	$	299	$	299
Settlement of positions	(64)		—
Increases/(Decreases) due to prior year positions	(235)		—
Ending balance at December 31	$	—	$	299

A tax benefit of $0.2 million was recognized in the consolidated statement of operations for the tax year ended December 31, 2021 related to the release of uncertain tax positions previously established. No additional unrecognized tax benefit was recorded in the consolidated statement of financial condition at December 31, 2021.

The following are the major jurisdictions in which the Company has significant business operations and the earliest open tax year subject to examination in these jurisdictions:

Jurisdiction:	Federal	New York State	New York City	United Kingdom	Luxembourg	Germany	Switzerland
Tax Year	2018	2018	2018	2017	2019	2017	2016

In November 2021, the Company concluded its New York State audit for tax years 2013-2017 which caused a release of the unrecognized tax benefits of $0.2 million.

The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in the United Kingdom, Malta, Germany, Switzerland, Canada, South Africa, and Hong Kong.