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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes

Note 12. Income Taxes

The Company has elected to be treated for U.S. federal income tax purposes as a RIC, whereby the Company generally will not be subject to U.S. federal income tax at corporate rates on any net ordinary income or capital gains that the Company timely distributes to its stockholders as dividends. The Company must generally distribute at least 90% of its investment company taxable income to maintain its RIC status. As part of maintaining RIC status, undistributed taxable income pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared prior to the due date for filing of the federal income tax return (including extensions) for the prior year, the 15th day of the 10th month following the prior tax year. Such taxable income carried forward to the next tax year will be subject to excise tax equal to 4% of the amount by which (i) 98% of the Company’s ordinary income recognized during a calendar year and (ii) 98.2% of the Company’s long term capital gains, as defined by Subchapter M of the Code, recognized for the one year period ending October 31st of a calendar year exceeds the respective distributions for the year. Excise tax is included as a component of income tax provision and income tax (provision) on realized gains on investments, depending on the character of the underlying taxable income (ordinary or capital gains), on the consolidated statements of operations.

The Taxable Subsidiaries hold certain portfolio investments for the Company. The Taxable Subsidiaries are consolidated for financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in the Company’s consolidated financial statements. The principal purpose of the Taxable Subsidiaries is to permit the Company to hold equity investments in portfolio companies which are “pass through” entities for U.S. federal income tax purposes in order to comply with the “source-of-income” requirements contained in the RIC tax provisions of Subchapter M of the Code. The Taxable Subsidiaries are not consolidated with the Company for U.S. federal corporate income tax purposes, and each Taxable Subsidiary is subject to U.S. federal corporate income tax on its taxable income. The Taxable Subsidiaries are taxed as corporations and do not intend to qualify as a RIC pursuant to Subchapter M of the Code. As corporations, the Taxable Subsidiaries are obligated to pay U.S. federal, state and local income tax on taxable income, as applicable. Income earned and gains realized on the investment or investments held by the Taxable Subsidiary are taxable to such subsidiary. A tax provision for ordinary income, if any, is shown as income tax provision in the Consolidated Statements of Operations of the Company. A tax provision for realized and unrealized gains on investments is included as a reduction of realized and unrealized gains (losses) on investments in the Consolidated Statements of Operations of the Company. For the years ended December 31, 2022, 2021, and 2020, the Taxable Subsidiaries were subject to a 21% U.S. federal income tax rate. The Company classifies interest and penalties, if any, as a component of income tax provision on the consolidated statements of operations. Income tax expense at the Taxable Subsidiaries is included as a component of the income tax provisions, depending on the character of the underlying taxable income (ordinary or capital gains), on the consolidated statements of operations. For the years ended December 31, 2022, 2021, and 2020, income tax expense at the Taxable Subsidiaries was $1,809, $1,827, and $628, respectively.

The Company and the Taxable Subsidiaries are also subject to various state and local income taxes.

The following table is a reconciliation of net increase in net assets resulting from operations on the consolidated statements of operations to taxable income and to total distributions declared to common stockholders for the years ended December 31, 2022, 2021, and 2020.

 

 

2022 (1)

 

 

2021

 

 

2020

 

Net increase in net assets resulting from operations

 

$

 

35,822

 

 

$

 

116,104

 

 

$

 

31,226

 

Net change in unrealized (appreciation) depreciation on investments

 

 

 

65,702

 

 

 

 

(41,496

)

 

 

 

6,578

 

Permanent book income and tax income differences

 

 

 

12,606

 

 

 

 

2,176

 

 

 

 

1,810

 

Temporary book income and tax income differences

 

 

 

(18,210

)

 

 

 

347

 

 

 

 

(5,091

)

Capital loss carry forward (utilization)

 

 

 

-

 

 

 

 

(25,024

)

 

 

 

3,385

 

Taxable income

 

 

 

95,920

 

 

 

 

52,107

 

 

 

 

37,908

 

Taxable income earned in prior year and carried forward for distribution in current year

 

 

 

33,839

 

 

 

 

20,832

 

 

 

 

15,432

 

Taxable Subsidiaries liquidating distributions

 

 

 

138

 

 

 

 

-

 

 

 

 

-

 

Deemed distribution of long term capital gains

 

 

 

(40,801

)

 

 

 

-

 

 

 

 

-

 

Taxable income earned in current period and carried forward for distribution in following year

 

 

 

(40,044

)

 

 

 

(33,839

)

 

 

 

(20,832

)

Total distributions to common stockholders

 

 $

 

49,052

 

 

 $

 

39,100

 

 

 $

 

32,508

 

 

(1)

The Company’s taxable income for 2022 is an estimate and will not be finalized until the Company files its 2022 federal income tax returns in 2023. Therefore, the Company’s actual taxable income, and the Company’s actual taxable income that was earned in 2022 and carried forward for distribution in 2023, may be different than this estimate.

For tax purposes, distributions paid to stockholders are reported as ordinary income, long term capital gains and return of capital, or a combination thereof. The tax character of distributions paid for the years ended December 31, 2022, 2021, and 2020 was as follows:

 

 

2022 (1)

 

 

2021

 

 

2020

 

Ordinary income

 

$

 

29,135

 

 

$

 

39,100

 

 

$

 

32,508

 

Long term capital gains

 

 

 

19,917

 

 

 

 

-

 

 

 

 

-

 

Return of capital

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Total distributions to common stockholders

 

 $

 

49,052

 

 

 $

 

39,100

 

 

 $

 

32,508

 

The Company estimates that it generated undistributed ordinary taxable income of approximately $28,818, or $1.18 per share, and undistributed long term capital gains of $11,225, or $0.45 per share, during 2022 that will be carried forward and distributed in 2023. Ordinary dividend distributions from a RIC do not qualify for the preferential U.S. federal income tax rate on dividend income from certain domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations.

The Company may distribute a portion of its realized net long term capital gains in excess of realized net short term capital losses to its stockholders, but may also decide to retain a portion, or all, of its net capital gains and elect to make a “deemed distribution” to its stockholders. For the year ended December 31, 2022, the Company elected to designate retained net capital gains of $40,801, or approximately $1.65 per share, as a deemed distribution, which was allocated to stockholders of record as of December 31, 2022. The Company incurred U.S. federal income taxes of $8,568, or approximately $0.35 per share, on behalf of stockholders related to this deemed distribution. Such U.S. federal income taxes were paid in January 2023. For the years ended December 31, 2021 and 2020, the Company did not elect to designate retained net capital gains as a deemed distribution.

As of December 31, 2022 and 2021, the tax basis components of distributable earnings were as follows:

 

 

December 31,

 

 

December 31,

 

 

 

2022 (1)

 

 

2021

 

Undistributed ordinary income

 

$

 

28,818

 

 

$

 

18,562

 

Undistributed long term capital gains

 

 

 

11,225

 

 

 

 

15,277

 

Unrealized appreciation (depreciation)

 

 

 

31,636

 

 

 

 

97,338

 

Temporary book/tax differences

 

 

 

12,967

 

 

 

 

(5,244

)

Capital loss carry forward

 

 

 

-

 

 

 

 

-

 

Total distributable earnings

 

 $

 

84,646

 

 

 $

 

125,933

 

 

(1)

The Company’s distributable earnings for 2022 is an estimate and will not be finally determined until the Company files its 2022 federal income tax returns in 2023. Therefore, the Company’s actual distributable earnings may be different than this estimate.

For federal income tax purposes, the cost of investments owned at December 31, 2022 and 2021 was approximately $811,962 and $623,527, respectively.

 

 

December 31,

 

 

December 31,

 

 

 

2022 (1)

 

 

2021

 

Tax-basis amortized cost of investments

 

$

 

811,962

 

 

$

 

623,527

 

Tax-basis gross unrealized appreciation on investments

 

 

 

87,884

 

 

 

 

110,481

 

Tax-basis gross unrealized depreciation on investments

 

 

 

(39,517

)

 

 

 

(14,884

)

Tax-basis net unrealized appreciation on investments

 

 

 

48,367

 

 

 

 

95,597

 

Fair value of investments

 

 $

 

860,329

 

 

 $

 

719,124

 

 

(1)

The Company’s tax-basis amortized cost of investments for 2022 is an estimate and will not be finally determined until 2023 when the Company receives the relevant tax forms from portfolio companies with equity investments. Therefore, the Company’s actual tax-basis amortized cost of investments may be different than this estimate.

Distributions from net investment income and net realized capital gains are determined in accordance with U.S. federal tax regulations, which may differ from amounts determined in accordance with GAAP and those differences could be material. These permanent book-to-tax differences are reclassified on the consolidated statements of changes in net assets to reflect their tax character but have no impact on total net assets. The following permanent book-to-tax differences were reclassified on the consolidated statements of changes in net assets for the years ended December 31, 2022, 2021, and 2020.

 

 

2022 (1)

 

 

2021

 

 

2020

 

Additional paid-in capital

 

$

 

(4,176

)

 

$

 

(2,175

)

 

$

 

(1,811

)

Total distributable earnings

 

 

 

4,176

 

 

 

 

2,175

 

 

 

 

1,811

 

 

(1)

The Company’s permanent book-to-tax reclassifications for 2022 are an estimate and will not be finalized until the Company files its 2022 federal income tax returns in 2023. Therefore, the Company’s actual permanent book-to-tax reclassifications may be different than this estimate. The Company adjusts such reclassifications in the following years when finalized, and such adjustments are reflected in the consolidated statements of changes in net assets and the consolidated statements of assets and liabilities.