Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.24.1
Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes
Note 12: Income Taxes
As a result of the Business Combinations, substantially all the Company’s assets and operations are held and conducted by P3 LLC and its subsidiaries, and the Company’s only assets are equity interests in P3 LLC. P3 LLC is treated as a partnership for U.S. federal and most applicable state and local income tax jurisdictions. As a partnership, P3 LLC is generally not subject to taxes, other than entity level state income taxes. Any taxable income or loss generated by P3 LLC is passed through to and included within the taxable income or loss of its members in accordance with the terms of the P3 LLC Amended & Restated Limited Liability Agreement dated as of the Closing Date (“P3 LLC A&R LLC Agreement”). Prior to the Business Combinations, the income and losses of P3 LLC were passed through to its members and nontaxable to P3 LLC.
The Company is taxed as a corporation and pays corporate federal, state, and local taxes on income allocated to it from P3 LLC based on the Company’s economic interest held in P3 LLC. While the Company consolidates P3 LLC for financial purposes as a VIE, the Company will not be taxed on the earnings attributed to the non-controlling interests. As a result, the income tax burden on the earnings taxed on the non-controlling interests is not reported by the Company in its consolidated financial statements.
The components of loss before income taxes were as follows:
Year Ended December 31,
2023 2022
(in thousands)
Domestic $ (183,731) $ (1,559,695)
Foreign —  — 
Total $ (183,731) $ (1,559,695)
The components of income tax expense were as follows:
Year Ended December 31,
2023 2022
(in thousands)
Current income taxes:
Federal $ 170  $ 111 
State 2,525  1,751 
Total current income taxes 2,695  1,862 
Deferred income taxes:
Federal —  — 
State —  — 
Total deferred income taxes —  — 
Total income tax expense $ 2,695  $ 1,862 
A reconciliation of the statutory federal income tax to the Company’s provision for income taxes is as follows:
Year Ended December 31,
2023 2022
(dollars in thousands)
Tax at federal statutory rate $ (38,584) $ (327,536)
Non-controlling interest and nontaxable income 24,486  260,020 
Change in valuation allowance 29,781  33,961 
Investment in P3 LLC (20,420) 35,147 
Return to provision 4,134  — 
Deferred tax adjustments 1,754  — 
Other reconciling items 1,544  270 
Total $ 2,695  $ 1,862 
Effective tax rate (1.5) % (0.1) %
The Company’s tax rate is affected primarily by the recognition of a valuation allowance and the portion of income and expense allocated to the non-controlling interest. It is also affected by discrete items that may occur in any given year such as benefits from changes in the fair value of private placement and public warrants.
Deferred Income Taxes
Deferred income taxes result from differences in the recognition of amounts for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of the Company’s deferred income tax assets and liabilities are as follows:
December 31,
2023 2022
(in thousands)
Deferred tax assets:    
Investment in P3 LLC $ 19,709  $ 20,684 
Net operating loss carryforwards 21,525  17,601 
Accrued liabilities 221  2,764 
Goodwill and identifiable intangible assets 1,923  589 
Section 163j interest limitation 3,031  1,995 
Other deferred tax assets 632  94 
Total deferred tax assets 47,041  43,727 
Less: valuation allowance (46,370) (43,558)
Net deferred tax assets 671  169 
Deferred tax liabilities:
Operating lease, right-of-use assets (338) (19)
Other deferred tax liabilities (333) (150)
Total deferred tax liabilities (671) (169)
Net deferred tax asset $ —  $ — 
The Company recognizes deferred tax assets to the extent it believes that these assets are more likely than not to be realized. The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available evidence as of December 31, 2023, the Company believes that it is more likely than not that the tax benefits of the U.S. losses incurred will not be realized. Accordingly, the Company has recorded a valuation allowance against the tax benefits of the U.S. losses incurred. The Company intends to maintain the valuation allowance on the U.S. net deferred tax assets until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.
The Company has recognized no deferred taxes in connection with its subsidiary, Medcore Health Plan Inc. (“MHP”). Because MHP does not file a consolidated corporate income tax return with the Company, the deferred tax assets of MHP are separately assessed for realizability. Based on the weight of all available evidence as of December 31, 2023, including cumulative losses in recent years, the Company believes that it is more likely than not that the tax benefits of the deferred tax assets of MHP will not be realized. Accordingly, the Company has recorded a valuation allowance against the tax benefits of the related deferred tax assets.
The Company has recognized no deferred taxes in connection with the Network VIEs. Because the Network VIEs do not file a consolidated corporate income tax return with the Company, the deferred tax assets are separately assessed for realizability. Based on the weight of all available evidence as of December 31, 2023, including cumulative losses in recent years, the Company believes that it is more likely than not that the tax benefits of the deferred tax assets of the Network VIEs will not be realized. Accordingly, the Company has recorded a valuation allowance against the tax benefits of the related deferred tax assets.
As of December 31, 2023, the Company has recognized a deferred tax asset with an offsetting valuation allowance in connection with its investment in P3 LLC. During 2023, the Company adjusted the deferred taxes on the investment in P3 LLC for changes in methodology and other adjustments recognized through entity.
As of December 31, 2023, the Company has U.S. federal income tax net operating loss carryforwards of $94.7 million available to offset future taxable income, all of which will be carried forward indefinitely, but utilization is limited to 80% of taxable income in any given year. The Company also has state net operating loss carryforwards of $33.9 million,
of which $1.5 million will expire in 2033, $4.5 million will expire in 2034, $6.5 million will expire in 2035, $5.5 million will expire in 2039, $0.1 million will expire in 2041, $2.3 million will expire in 2042, $0.5 million will expire in 2043, and $13.0 million will be carried forward indefinitely.
The federal and state net operating loss carryforwards may be subject to limitations under Section 382 and Section 383 of the Internal Revenue Code of 1986 (the “Code”) and similar provisions under state law. The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. The Company has completed a Section 382 analysis covering the period January 1, 2018 through September 30, 2023. The Section 382 analysis tested the Company’s stock for each occurrence of stock issuance during the covered period. Through the analysis period, ownership changes were identified resulting in annual limitations to tax attributes; however, due to the indefinite carryforward of U.S. federal income tax net operating losses, no such carryforwards have been derecognized.
The Company did not record any penalties or interest related to income taxes or uncertain tax positions, as management has concluded that no such positions exist, on the consolidated balance sheets as of December 31, 2023 and 2022. In addition, the Company did not record any penalties or interest related to income taxes on the consolidated statements of comprehensive income during the years ended December 31, 2023 and 2022.
The Company is subject to examination for tax years beginning with the year ended December 31, 2020. The Company is not currently under any U.S. federal or state income tax audits for any tax year.
Tax Receivable Agreement
In connection with the Business Combinations, the Company entered into a TRA that provides for the payment by the Company of 85% of the amount of any tax benefits that are realized, or in some cases are deemed to realize, as a result of (i) increases in the Company’s share of the tax basis in the net assets of P3 LLC resulting from any redemptions or exchanges of P3 LLC, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA. The Company expects to benefit from the remaining 15% of any tax benefits that are realized.
Pursuant to the Company’s election under Section 754 of the Code, the Company expects to obtain an increase in its share of the tax basis in the net assets of P3 LLC when Common Units are redeemed or exchanged. The Company intends to treat any redemptions and exchanges of Common Units as direct purchases of the units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent the tax basis is allocated to those capital assets.
The estimation of liability under the TRA is, by its nature, imprecise and subject to significant assumptions regarding a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable, among other factors. Actual tax benefits realized by the Company may differ from tax benefits calculated under the TRA as a result of the use of certain assumptions in the TRA, including the use of an assumed weighted-average state and local income tax rate to calculate tax benefits.
The payment obligation under the TRA is an obligation of the Company and not of P3 LLC. The payments that the Company will be required to make will generally reduce the amount of the overall cash flow that might have otherwise been available, but the Company expects the cash tax savings realized from the utilization of the related tax benefits will exceed the amount of any required payments.
As of December 31, 2023 and 2022, the TRA liability is estimated to be $11.0 million and $4.6 million, respectively; however, due to the full valuation allowance recorded by the Company, which results in no tax benefits that are to be realized related to the amortization of the step-up, the Company determined that payments to TRA holders are not probable and no TRA liability has been recorded as of December 31, 2023 and 2022. As non-controlling interest holders exercise their right to exchange their Common Units, a TRA liability may be recorded based on 85% of the estimated future tax benefits that the Company may realize as a result of increases in its tax basis of P3 LLC. The amount of the increase in the tax basis, the related estimated tax benefits, and the related TRA liability to be recorded will depend on the price of a share of the Company’s Class A common stock at the time of the relevant redemption or exchange.