Income Taxes

12 Months Ended

Sep. 30, 2019

INCOME TAXESi3 Verticals, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from i3 Verticals, LLC based on i3 Verticals, Inc.'s economic interest in i3 Verticals, LLC. i3 Verticals, LLC's members, including the Company, are liable for federal, state and local income taxes based on their share of i3 Verticals, LLC's pass-through taxable income. i3 Verticals, LLC is not a taxable entity for federal income tax purposes, but is subject to and reports entity level tax in both Tennessee and Texas. In addition, certain subsidiaries of i3 Verticals, LLC are corporations that are subject to state and federal income taxes.

As of September 30, 2019 and 2018, the Company had accrued no interest and no penalties related to uncertain tax positions. It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.


	Year ended September 30,
	2019		2018		2017
Current:
Federal tax expense	$	220	$	668	$	—
State tax expense	189		351		121
Deferred
Federal tax (benefit)	(487)		(685)		—
State tax expense (benefit)	(99)		3		56
Income tax expense	$	(177)	$	337	$	177

A reconciliation of income tax expense from operations computed at the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:


	Year ended September 30,
	2019						2018						2017
Expected U.S. federal income taxes at statutory rate	$	81	21.0	%	$	(1,139)	24.6	%	$	370	34.3	%
Partnership income not taxed at federal level	(1,007)		(260.9)	%	294		(6.4)	%	(1,352)		(125.3)	%
Valuation allowance	251		65.0	%	965		(20.9)	%	914		84.7	%
State and local income taxes, net of federal benefit	104		26.9	%	295		(6.4)	%	177		16.4	%
Nondeductible expenses	393		101.8	%	398		(8.6)	%	67		6.2	%
Federal tax rate change	—		—	%	(471)		10.2	%	—		—	%
Other	1		0.3	%	(5)		0.1	%	1		0.1	%
Income tax (benefit) expense	$	(177)	(45.9)	%	$	337	(7.3)	%	$	177	16.4	%

Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Net deferred taxes spanning multiple jurisdictions as of September 30, 2019 and 2018 were as follows:


	September 30,
	2019		2018 (revised)
Deferred tax assets:
Investment in partnership⁽¹⁾	$	40,880	$	14,443
Stock-based compensation	811		186
Tax Receivable Agreement	—		193
Deferred revenue	564		571
Accrued expenses	110		29
Net operating loss carryforwards⁽¹⁾	6,360		1,775
Section 163j carryforward	2,006		—
Other	42		33
Gross deferred tax assets	50,773		17,230
Valuation allowance⁽¹⁾	(16,609)		(15,517)

Deferred tax liabilities:
Intangible assets	$	(6,257)	$	(1,656)
Other	(285)		(5)
Net deferred tax asset	$	27,622	$	52

_________________

1.During the preparation of the Company’s 2019 financial statements, management determined that immaterial adjustments were necessary to correct certain 2018 amounts in the table above as follows. The deferred tax asset related to the Company’s investment in partnership was decreased by $7,515 with an equal decrease in the valuation allowance. Additionally, the amount associated with net operating loss carryforwards was increased by $1,672 with a corresponding increase in the valuation allowance. These adjustments had no effect on the Company’s consolidated financial position, results of operations or cash flows for any period presented herein.

Federal and state net operating loss carryforwards for the Company were $70,970 as of September 30, 2019 and will begin to expire in 2024. The net operating loss carryforwards are included in Other assets within the Consolidated Balance Sheets. The use of these federal and state net operating losses is limited to the future taxable income of separate legal entities. Based on expectations of future taxable income, management believes that it is more likely than not that the results of operations for certain separate legal entities will not generate sufficient taxable income to realize portions of these net operating loss benefits. As a result, a valuation allowance has been provided for the loss carryforwards for these specific legal entities.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The legislation contains several key tax provisions, including the reduction of the federal corporate income tax rate to 21% effective January 1, 2018, as well as a variety of other changes, including limitation of the tax deductibility of interest expense, acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction. The SEC staff issued Staff Accounting Bulletin No. 118, which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year after the enactment date. As of December 22, 2018, the Company completed its accounting for all of the enactment-date income tax effects of the Tax Cuts and Jobs Act. The Company made no material adjustments to the provisional amounts recorded.

Tax Receivable Agreement

On June 25, 2018, the Company entered into a Tax Receivable Agreement with i3 Verticals, LLC and each of the Continuing Equity Owners (the “Tax Receivable Agreement”) that provides for the payment by the Company to the Continuing Equity Owners of 85% of the amount of certain tax benefits, if any, that it actually realizes, or in some circumstances, is deemed to realize in its tax reporting, as a result of (i) future redemptions funded by the Company or exchanges, or deemed exchanges in certain circumstances, of Common Units of i3 Verticals, LLC for Class A common stock of i3 Verticals, Inc. or cash, and (ii) certain additional tax benefits attributable to payments made under the Tax Receivable Agreement. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners maintaining a continued ownership interest in i3 Verticals, LLC. If a Continuing Equity Owner transfers Common Units but does not assign to the transferee of such units its rights under the Tax Receivable Agreement, such Continuing Equity Owner generally will continue to be entitled to receive payments under the Tax Receivable Agreement arising in respect of a subsequent exchange of such Common Units. In general, the Continuing Equity Owners’ rights under the Tax Receivable Agreement may not be assigned, sold, pledged or otherwise alienated to any person, other than certain permitted transferees, without (a) the Company's prior written consent, which should not be unreasonably withheld, conditioned or delayed, and (b) such persons becoming a party to the Tax Receivable Agreement and agreeing to succeed to the applicable Continuing Equity Owner’s interest therein. The Company expects to benefit from the remaining 15% of the tax benefits, if any, that the Company may realize.

During the year ended September 30, 2018, in conjunction with the Company's IPO, i3 Verticals, Inc. purchased Class B common stock from a Continuing Equity Owner for $4,635. This transaction triggered an increase in the tax basis of the Company's Common Units in i3 Verticals, LLC subject to the provisions of the Tax Receivable Agreement. The Company recognized a deferred tax asset in the amount of $960 and a corresponding liability of $816, representing 85% of the tax benefits due to the Continuing Equity Owners related to exchanges in the year ended September 30, 2018.