|12 Months Ended|
Dec. 31, 2022
Income (Loss) Before Income Taxes
Our income (loss) before income taxes is comprised of the following:
The income (loss) before income taxes above includes the pre- and post-IPO periods during the year ended December 31, 2021. Prior to the IPO, Solaris LLC was structured as a partnership and, therefore, was subject to certain limited liability corporation entity-level taxes, but generally not subject to U.S. federal income taxes. As part of the Corporate Reorganization, Aris Inc. was created as a C Corporation and is now subject to U.S. federal and state taxes. See Note 1. Organization and Background of Business.
Income Tax Provision
The income tax provision consists of the following:
Effective Tax Rate (“ETR”)
A reconciliation of the U.S. federal statutory income tax rate to our effective tax rate is comprised of the following:
The total effective tax rates for the years ended December 31, 2022, 2021 and 2020 were 9.8%, (4.4)%, and 0.0%, respectively.
For the year ended December 31, 2022, the difference between the U.S. federal statutory tax rate and the total effective tax rate was due primarily to the impact of the noncontrolling interests.
For the year ended December 31, 2021, the difference between the U.S. federal statutory tax rate and the total effective tax rate was due primarily to the organizational structure discussed above whereby the U.S. income (loss) flowed through to partners. The most significant items impacting the effective tax rate included the non-controlling interest and the non-deductible pre-IPO loss.
As part of the Corporate Reorganization, Aris, Inc. acquired an ownership interest in Solaris LLC and its subsidiaries. Solaris LLC is treated as a partnership for U.S. federal tax purposes and in most applicable jurisdictions for state and local income tax purposes. Any taxable income or loss generated by Solaris LLC,
after Aris Inc.'s acquisition of its portion of Solaris LLC, is passed through and included in the taxable income or loss of its members, including Aris Inc., in accordance with the terms of the Solaris LLC operating agreement. Aris Inc. is a C Corporation and is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income of Solaris LLC. As Solaris LLC and its subsidiaries are consolidated in our financial statements, we remove U.S. pre-tax book income (loss) not attributable to Aris Inc. which resulted in a decrease to the tax benefit of none and $2.2 million for the pre-IPO loss for the years ended December 31, 2022 and 2021, respectively, and an increase to the benefit of $0.6 million and $0.5 million for the noncontrolling interests for the years ended December 31, 2022 and 2021, respectively.
Deferred Tax Assets and Liabilities
The tax effects of each type of temporary difference and carryforward that give rise to a significant deferred tax asset or liability as of December 31, 2022 and 2021 are as follows:
The net deferred income tax asset at December 31, 2022 is comprised of total deferred income tax assets net of valuation allowance of $82.8 million, related primarily to net operating losses (“NOLs”), offset by a deferred income tax liability of $52.4 million pertaining to investment in partnership.
The net deferred income tax asset at December 31, 2021 is comprised of total deferred income tax assets net of valuation allowance of $67.2 million, related primarily to NOLs, offset by a deferred income tax liability of $47.2 million pertaining to investment in partnership. The initial recognition of the deferred income tax asset was recorded as an increase to additional paid-in capital on the date of IPO and subsequent conversion of Solaris LLC units as a result of the Corporate Reorganization.
At December 31, 2022, we had unused federal NOL carryforwards for federal income tax purposes of approximately $330.0 million, which can be carried forward indefinitely, and $1.4 million, which expire from 2037 through 2038 and may be used to offset future taxable income. In addition, we had unused NOL carryforwards for state income tax purposes of approximately $190.7 million, which can be carried forward indefinitely, and $13.0 million, which expire from 2038 through 2040. All deferred tax assets are evaluated using positive and negative evidence as to their future realization.
As of December 31, 2022, we believe that it is more likely than not that the benefit from certain state NOL carryforwards will not be realized. In recognition of this, we have provided a valuation allowance of $0.6 million on the deferred tax assets related to these state NOL carryforwards.
Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our domestic NOL and tax credit carryforwards may be limited in future periods. Further, a portion of the state carryforwards may expire before being applied to reduce future income tax liabilities. If there is a change in our assessment of the amount of deferred income tax assets that are realizable, adjustments to the valuation allowance will be made in future periods.
Our predecessor, Solaris LLC, is a Delaware limited liability company treated as a partnership for federal income tax purposes and, therefore, has not been subject to U.S. federal income tax at an entity level. As a result, the consolidated net income (loss) in our historical financial statements does not reflect the tax expense (benefit) we would have incurred if we were subject to U.S. federal income tax at an entity level during periods prior to the IPO. Solaris LLC continues to be treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income is allocated to members, including Aris Inc., and except for Texas franchise tax, any taxable income of Solaris LLC is reported in the respective tax returns of its members.
Management evaluates uncertain tax positions for recognition and measurement in the financial statements. To recognize a tax position, we determine whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the financial statements. As of December 31, 2022, we have no significant uncertain tax positions.
Solaris LLC files income tax returns in the U.S. federal jurisdiction and various states. There are currently no federal or state income tax examinations underway for these jurisdictions. Its federal and state returns remain open to examination for tax years 2018 through 2022.
Solaris LLC is subject to a franchise tax imposed by the State of Texas. The franchise tax rate is 1%, calculated on taxable margin. Taxable margin is defined as total revenue less deductions for cost of goods sold or compensation and benefits in which the total calculated taxable margin cannot exceed 70% of total revenue. Total expense related to Texas margin tax was immaterial for the years ended December 31, 2022 and 2021. Solaris LLC is also subject to New Mexico corporate income and franchise taxes.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef