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Income Taxes
6 Months Ended
Jun. 30, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
We are subject to U.S. federal and state income taxes with respect to our allocable share of any taxable income or loss of Topco LLC generated after the IPO, as well as any stand-alone income or loss we generate. Topco LLC is organized as a limited liability company and treated as a partnership for federal tax purposes, with the exception of Maravai Life Sciences, Inc., the parent entity of Vector, and its subsidiaries who are taxpaying entities in the U.S., Canada, and the U.K. Topco LLC generally does not pay income taxes on its taxable income in most jurisdictions. Instead, Topco LLC’s taxable income or loss is passed through to its members, including us. Maravai Life Sciences, Inc. files and pays corporate income taxes for U.S. federal and state income tax purposes and internationally, primarily within the U.K. and Canada. Aside from the expected sale of Vector, as discussed in Note 3, we anticipate this structure to remain in existence for the foreseeable future.
On March 11, 2021, the President signed the American Rescue Plan Act of 2021 (“ARPA”) into law. ARPA includes several provisions, such as measures that extend and expand the employee retention credit, previously enacted under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), through December 31, 2021. ARPA also contains other provisions that do not have a material impact on our income tax expense and effective tax rate.
The following table summarizes the Company’s income tax expense and effective tax rate for the periods presented (in thousands, except percentages):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Income before income taxes$145,730 $677 $235,291 $28,191 
Income tax expense (benefit)$11,386 $(765)$25,095 $2,870 
Effective tax rate7.8 %(113.0)%10.7 %10.2 %
The Company’s effective tax rates of 7.8% and 10.7% for the three and six months ended June 30, 2021, respectively, differed from the U.S. federal statutory rate of 21.0%, primarily due to income associated with the non-controlling interest, nondeductible expense related to the tax receivable agreement, and a provisional tax benefit of $2.8 million recorded at Maravai Life Sciences Inc. for the book-tax outside basis difference on Vector due to it meeting the held for sale criteria at June 30, 2021 (see Note 3).
The provision for income taxes for the three and six months ended June 30, 2020 relate to the corporate operating companies under Maravai LifeSciences Holdings, Inc. as we did not own units in Topco LLC. The Company’s effective tax rates of (113.0)% and 10.2% for the three and six months ended June 30, 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to income associated with the non-controlling interest and a discrete tax charge associated with a building sale offset with a release of valuation allowance on our excess interest expense carryforward due to the enactment of the CARES Act, which modified the calculation of interest deductions for 2019 and 2020.
As a result of the Organizational Transactions and our IPO occurring during the year ended December 31, 2020, we acquired LLC Units and recognized a deferred tax asset for the difference between the financial reporting and tax basis of our investment in Topco LLC which included net deferred tax assets of $445.5 million less a $13.3 million valuation allowance as of December 31, 2020 associated with: (i) $364.4 million related to temporary differences in the book basis as compared to the tax basis of our Company’s investment in Topco LLC and (ii) $81.1 million related to tax benefits from future deductions attributable to payments under the TRA.
As a result of the Secondary Offering in April 2021, the Company recognized additional tax basis in our investment in Topco LLC resulting in an increase in deferred tax assets and additional paid-in capital of $128.2 million. The Secondary Offering also resulted in an increase to the payable to related parties pursuant to the Tax Receivable Agreement of $137.7 million, which resulted in an increase to the associated deferred tax asset and additional paid-in capital of approximately $28.4 million.
The realizability of the Company’s deferred tax asset related to its investment in Topco LLC depends on the Company receiving allocations of tax deductions for its tax basis in the investment and on the Company generating sufficient taxable income to fully offset such deductions. We believe it is more likely than not that the Company will generate sufficient taxable income in the future to fully realize any deductions allocated to it from Topco LLC associated with the reversal of its tax basis as of June 30, 2021.
Tax Distributions to Topco LLC’s Owners
Topco LLC is subject to an operating agreement put in place at the date of the Organizational Transactions. The agreement has numerous provisions related to allocations of income and loss, as well as timing and amounts of distributions to its owners. This agreement also includes a provision requiring cash distributions enabling its owners to pay their taxes on income passing through from Topco LLC. These tax distributions are computed based on an assumed income tax rate equal to the sum of (i) the maximum combined marginal federal and state income tax rate applicable to an individual and (ii) the net investment income tax. The assumed income tax rate currently totals 46.7%, which may increase to 54.1% in certain cases where the qualified business income deduction is unavailable.
In addition, under the tax rules, Topco LLC is required to allocate taxable income disproportionately to its unit holders. Because tax distributions are determined based on the holder of LLC Units who is allocated the largest amount of taxable income on a per unit basis, but are made pro rata based on ownership, Topco LLC is required to make tax distributions that, in the aggregate, will likely exceed the amount of taxes Topco LLC would have otherwise paid if it were taxed on its taxable income at the assumed income tax rate. Topco LLC is subject to entity level taxation in certain states and certain of its subsidiaries are subject to entity level U.S. and foreign income taxes. As a result, the accompanying consolidated statements of income include income tax expense related to those states and to U.S. and foreign jurisdictions where Topco LLC or any of our subsidiaries are subject to income tax.
During the three months ended June 30, 2021, Topco LLC paid tax distributions of $59.5 million to its owners, including $26.4 million to us. During the six months ended June 30, 2021, Topco LLC paid tax distributions of $96.5 million to its owners, including $40.3 million to us. As of June 30, 2021, no amounts for tax distributions have been accrued as such payments were made during the periods.