v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
In August 2022, the U.S. President signed into law the Inflation Reduction Act of 2022 (the “IRA”), which revised U.S. tax law by, among other things, including a new corporate alternative minimum tax (the “CAMT”) of 15% on certain large corporations, imposing a 1% excise tax on stock buybacks, and providing incentives to address climate change, including the introduction of advanced manufacturing production tax credits. The provisions of the IRA are generally effective for tax years beginning after 2022. Given the complexities of the IRA, which is pending technical guidance and regulations from the Internal Revenue Service and U.S. Treasury Department, we will continue to monitor these developments and evaluate the potential future impact to our results of operations.
The Company is taxed as a subchapter C corporation and is subject to federal and state income taxes. The Company’s sole material asset is Shoals Parent, which is a limited liability company that is taxed as a partnership for US federal and certain state and local income tax purposes. Shoals Parent’s net taxable income and related tax credits, if any, are passed through to its members and included in the member’s tax returns.
Shoals Parent is subject to and reports an entity level tax in various states. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under U.S. GAAP. As a result, the Company’s effective tax rate differs materially from the statutory rate. Our effective income tax rate for the years ended December 31, 2022 and 2021, was 6% and 2% respectively.
The components of income before income taxes are as follows (in thousands):
Year Ended December 31,
20222021
Domestic$152,000 $4,030 
Foreign— — 
Income before income taxes$152,000 $4,030 

The components of income tax expense are as follows (in thousands):
Year Ended December 31,
20222021
Current income taxes:
Federal$— $— 
State554 631 
Foreign— — 
Total current income taxes554 631 
Deferred income taxes:
Federal13,639 397 
State(5,233)(1,873)
Foreign— — 
Total deferred income taxes8,406 (1,476)
Other tax expense27 931 
Income tax expense$8,987 $86 
The differences between income taxes expected at the U.S. federal statutory income tax rate and the reported income tax expense are summarized as follows (in thousands):
Year Ended December 31,
20222021
U.S. federal income taxes at statutory rate$31,920 $846 
State and local income tax net of federal benefit4,786 (1,380)
Permanent tax adjustments268 342 
Pre-IPO income— (562)
Non-controlling interest(3,289)(342)
Termination of TRA(15,905)349 
Remeasurement of deferred taxes(5,966)(1,939)
Research and development credit— (77)
Uncertain tax positions27 789 
Change in valuation allowance(1,983)1,983 
Other(871)77 
Income tax expense$8,987 $86 

The income tax burden on the earnings taxed to the noncontrolling interests holders is not reported by the Company in its consolidated financial statements under U.S. GAAP. As a result, the Company’s effective tax rate differs materially from the statutory rate. The primary factors impacting the effective tax rate are the allocation of income taxes to the noncontrolling interest, remeasurement of deferred tax attributes due to tax rate changes, state taxes and changes in our valuation allowance.
The components of the deferred tax assets and liabilities are as follows (in thousands):
Year Ended December 31,
20222021
Investment in Shoals Parent$286,759 $161,078 
Tax receivable agreement— 13,014 
Net operating loss4,626 3,772 
Other249 1,077 
Total deferred income taxes291,634 178,941 
Valuation allowance— (1,983)
Net deferred tax asset$291,634 $176,958 

The Company has recorded deferred tax assets of $286.8 million, included above in Investment in Shoals Parent, associated with basis differences in the net assets of Shoals Parent and pursuant to making an election under Section 754 of the Internal Revenue Code of 1986, as amended. Prior to termination of the TRA, the aggregate payable pursuant to the TRA represented 85% of the tax benefits that the Company expected to receive in connection with the Section 754 election.
As of December 31, 2022, the Company has $20.2 million and $6.4 million federal and state net operating loss carryforwards, respectively. If not utilized, $20.2 million of the federal net operating loss can be
carried forward indefinitely. If not utilized, $0.4 million of the state net operating loss can be carried forward indefinitely and $6.0 million will expire between 2036-2042.
Quarterly, the Company considers whether it is more-likely-than-not that the deferred tax assets will be realized based on available positive and negative evidence. As of December 31, 2022, we determined, based upon weighing all positive and negative evidence, that a valuation allowance related to state taxes was no longer required. Accordingly, we reversed the valuation allowance related to state taxes. As of December 31, 2021, the valuation allowance of $2.0 million related to state taxes.
Uncertain Tax Positions
The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. As of December 31, 2022 and 2021, the Company has recorded $1.0 million and $0.9 million, respectively, of gross unrecognized tax benefits inclusive of interest and penalties, all of which, if recognized, would favorably impact the effective tax rate. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations.
The following table presents a reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties as follows (in thousands):
Year Ended December 31,
20222021
Beginning Balance$604 $— 
Gross increases - tax positions in prior period— 604 
Gross decreases - tax positions in prior period— — 
Gross increases - tax positions in current period— — 
Settlement— — 
Lapse of statute of limitations— — 
Ending balance$604 $604 

We do not expect a significant change in our uncertain tax benefits in the next twelve months.
The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are generally subject to examination by U.S. federal and state taxing authorities for years beginning after 2018.