11.Income Taxes

Income Before Income Taxes

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Our income before income taxes is comprised of the following:

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Income Tax Provision

The income tax provision consists of the following:

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Federal income taxes payable were $0.9 million and $12 thousand as of December 31, 2024 and 2023, respectively. State income taxes payable were $0.3 million and $0.1 million as of December 31, 2024 and 2023, respectively.

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:

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The total effective tax rates for the years ended December 31, 2024, 2023 and 2022 were 14.7%, 14.7% and 9.8%, respectively.

For the years ended December 31, 2024, 2023 and 2022, the difference between the U.S. federal statutory tax rate and the total effective tax rate was primarily due to the impact of the noncontrolling interest.

We have 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 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.

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, 2024 and 2023 are as follows:

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The net deferred income tax asset at December 31, 2024 is comprised of total deferred income tax assets net of valuation allowance of $81.5 million, related primarily to net operating losses (“NOLs”), offset by a deferred income tax liability of $68.1 million pertaining to investment in partnership.

The net deferred income tax asset at December 31, 2023 is comprised of total deferred income tax assets net of valuation allowance of $87.9 million, related primarily to NOLs, offset by a deferred income tax liability of $65.3 million pertaining to investment in partnership.

At December 31, 2024, we had unused federal NOL carryforwards for federal income tax purposes of approximately $315.9 million, which can be carried forward indefinitely and may be used to offset future taxable income. In addition, at December 31, 2024, we had unused NOL carryforwards for state income tax purposes of approximately $171.9 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, 2024, 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, as of December 31, 2024. The valuation allowance was also $0.6 million as of December 31, 2023.

Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our domestic NOL 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.

Other

Solaris LLC, is a Delaware limited liability company treated as a partnership for federal income tax purposes and, therefore, is not subject to U.S. federal income tax at an entity level. 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 consolidated 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 consolidated financial statements. As of December 31, 2024, 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 2020 through 2024.

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 $0.2 million, $0.1 million and $0.1 million for the years ended December 31, 2024, 2023 and 2022, respectively.