The Company is taxed as a corporation for income tax purposes and is subject to federal, state, and local taxes with respect to its allocable share of any net taxable income from the LLC. The LLC is a limited liability company taxed as a partnership for income tax purposes, and its taxable income or loss is passed through to its members, including the Company. The LLC is subject to income taxes on its taxable income in certain foreign countries, in certain state and local jurisdictions that impose income taxes on partnerships, and on the taxable income of its U.S. corporate subsidiaries.

Common Control Reorganization (“CCR”)

Subsequent to the acquisition of Socius, which was purchased by a wholly owned subsidiary of Ryan Specialty Holdings, Inc., the Company converted Socius to an LLC (“Socius LLC”) and transferred Socius LLC to the LLC. This legal entity reorganization was considered a transaction between entities under common control. The CCR resulted in deferred tax liabilities of $64.5 million and non-cash deferred income tax expense of $20.7 million. Additionally, the difference between the carrying value and the fair value of the investment transferred under common control resulted in an increase of $13.1 million to Non-controlling interests on the Consolidated Statements of Stockholders’ Equity during the three months ended September 30, 2023.

Effective Tax Rate

The Company’s effective tax rate from continuing operations was 61.26% and 10.44% for the three months ended September 30, 2023 and 2022, respectively, and 23.92% and 7.90% for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate for the three and nine months ended September 30, 2023 was higher than the 21% statutory rate primarily as a result of the $20.7 million non-cash deferred income tax expense from the CCR, which was recognized in Income tax expense in the Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2023. The effective tax rate for the three months ended September 30, 2022 was lower than the 21% statutory rate primarily as a result of the tax benefit from the vesting of Staking RSUs and the income attributable to the non-controlling interests. The effective tax rate for the nine months ended September 30, 2022 was lower than the 21% statutory rate primarily as a result of the changes in state tax rates and the income attributable to the non-controlling interests.

The Company does not believe it has any significant uncertain tax positions and therefore has no unrecognized tax benefits as of September 30, 2023, that, if recognized, would affect the annual effective tax rate. The Company does not anticipate material changes in unrecognized tax benefits within the next twelve-month period. The Company’s 2021 tax year filings are open to examination by taxing authorities for U.S. federal and state income tax purposes.

Deferred Taxes

The Company reported Deferred tax assets, net of deferred tax liabilities where appropriate, of $383.1 million and $396.8 million as of September 30, 2023 and December 31, 2022, respectively, on the Consolidated Balance Sheets. The change in Deferred tax assets during the nine months ended September 30, 2023 was primarily a result of the deferred tax liabilities arising from the CCR offset by an increase in deferred tax assets related to exchanges of LLC Common Units.

As of September 30, 2023, the Company concluded that, based on the weight of all available positive and negative evidence, the Deferred tax assets with respect to the Company’s basis difference in its investment in the LLC are more likely than not to be realized. As such, no valuation allowance has been recognized against that basis difference.

Tax Receivable Agreement (TRA)

The Company is party to a TRA with current and certain former LLC Unitholders. The TRA provides for the payment by the Company to the current and certain former LLC Unitholders of 85% of the net cash savings, if any, in U.S. federal, state, and local income taxes that the Company realizes (or is deemed to realize in certain circumstances) as a result of (i) certain increases in the tax basis of the assets of the LLC resulting from purchases or exchanges of LLC Common Units (“Exchange Tax Attributes”), (ii) certain tax attributes of the LLC that existed prior to the IPO (“Pre-IPO M&A Tax Attributes”), (iii) certain favorable “remedial” partnership tax allocations to which the Company becomes entitled (if any), and (iv) certain other tax benefits related to the Company entering into the TRA, including certain tax benefits attributable to payments that the Company makes under the TRA (“TRA Payment Tax Attributes”). The Company recognizes a liability on the Consolidated Balance Sheets based on the undiscounted estimated future payments under the TRA. The amounts payable under the TRA will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of the Company in the future.

Based on current projections, the Company anticipates having sufficient taxable income to be able to realize the benefits and has recorded Tax Receivable Agreement liabilities of $359.1 million related to these benefits on the Consolidated Balance Sheets as of September 30, 2023. The following summarizes activity related to the Tax Receivable Agreement liabilities:

During the nine months ended September 30, 2023 and 2022, the TRA liabilities increased $63.2 million and $23.1 million, respectively, due to exchanges of LLC Common Units for Class A common stock, which was recognized in Additional paid-in capital on the Consolidated Statements of Stockholders’ Equity. Additionally, during the nine months ended September 30, 2022, the Company remeasured the TRA liabilities due to changes in state tax rates resulting in a $7.2 million expense as the Company increased its estimated cash tax savings rate from 25.12% to 25.65%. The change was recognized in Other non-operating loss (income) on the Consolidated Statements of Income (Loss).

Other Comprehensive Income (Loss)

The tax expense (benefit) on the components of Other comprehensive income (loss) for the three and nine months ended September 30, 2023 were $(0.2) million and $(0.1) million, respectively, for Foreign currency translation adjustments, $(0.1) million and $0.1 million, respectively, for Change in share of equity method investment in related party other comprehensive income (loss), $0.9 million and $2.6 million, respectively, for Gain on interest rate cap, and $(0.7) million and $(1.9) million, respectively, for the (Gain) on interest rate cap reclassified to earnings. The tax expense (benefit) on the components of Other comprehensive income (loss) for the three and nine months ended September 30, 2022 were $(0.5) million and $(1.0) million, respectively, for Foreign currency translation adjustments, and $(0.2) million and $(0.7) million, respectively, for Change in share of equity method investment in related party other comprehensive income (loss), and $2.6 million and $2.7 million, respectively, for Gain on interest rate cap.