Income Taxes

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to its year-to-date pretax book income or loss. The tax effects of discrete items, including but not limited to, excess tax benefits associated with stock-based compensation, are reported in the interim period in which they occur. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 19.0% and 226.7% for the three months ended September 30, 2023 and 2022, respectively. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 1,698.9% and (62.9)% for the nine months ended September 30, 2023 and 2022, respectively. Our effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings, acquisitions and dispositions, and changes to our valuation allowance positions. The primary drivers causing fluctuations in our effective tax rate each period were (i) the Barstool transactions, (ii) excluding certain foreign losses for which no tax benefit can be recognized in our worldwide effective tax rate calculation, and (iii) changes to the valuation allowance.

As of each reporting date, the Company considers all available positive and negative evidence that could affect its view of the future realization of deferred tax assets pursuant to ASC Topic 740, “Income Taxes.” As of September 30, 2023, we intend to continue maintaining a valuation allowance on our deferred tax assets that are not more likely than not to be realized, until there is sufficient positive evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance could result in a significant decrease to income tax expense in the period the release is recorded. Although the exact timing and valuation reversal amount are estimated, the actual determination is contingent upon the earnings level we achieve in 2023 as well as our projected income levels in future periods. During the three and nine months ended September 30, 2023, the Company’s valuation allowance increased in the amount of $53.0 million and $50.9 million, respectively, primarily due to a capital loss carryforward generated on the Barstool disposition, that is more likely than not to be realized.

During the three months ended March 31, 2023, the Company recorded a net deferred tax liability of $115.9 million with respect to the Barstool stock acquisition on February 17, 2023, which was subsequently written off to income tax expense on August 8, 2023, as part of the Barstool disposition, as discussed in Note 6, “Acquisitions and Dispositions.” These temporary differences were primarily related to the fair value accounting adjustments on the acquired intangible assets (excluding goodwill) and existing carryover tax basis, including acquired federal and state net operating losses. Barstool’s operations are included in our consolidated federal, state and local tax returns for the stub period ended August 8, 2023, which has an immaterial impact on our effective tax rate in certain jurisdictions.

The Company recorded prepaid income taxes of $54.4 million and $15.2 million as of September 30, 2023 and December 31, 2022, respectively, which are included in “Prepaid expenses” within our unaudited Consolidated Balance Sheets.