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Income Taxes | 12 Months Ended
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Dec. 31, 2024
Income Tax Disclosure [Abstract] |
Income taxes | 12. INCOME TAXES Before May 17, 2022, the ProFrac Predecessor entities were organized as limited liability companies or a limited partnership and were treated as either a disregarded entity or a partnership for U.S. federal income tax purposes, whereby the ordinary business income or loss and certain deductions were passed-through and reported on the members’ income tax returns. As such, we were not required to account for U.S. federal income taxes in our consolidated financial statements. Certain state income-based taxes are imposed on the Company which are reflected as income tax expense or benefit in historical periods. In connection with the IPO in May 2022, the Company reorganized and ProFrac LLC became partially owned by ProFrac Corp., a C-Corporation. ProFrac Corp. is a taxable entity and is required to account for income taxes under the asset and liability method for periods subsequent to May 17, 2022. In connection with the Redemption in April 2023, ProFrac LLC became wholly owned by ProFrac Corp. In 2024, we effectuated a legal entity reorganization that resulted in ProFrac LLC becoming a disregarded entity for U.S. federal income tax purposes. As a result, our accounting under the asset and liability method in 2024 is based on the underlying assets and liabilities of ProFrac LLC. The following table summarizes the components of income tax expense (benefit):
|  | Year Ended December 31, |
|  | 2024 |  |  | 2023 |  |  | 2022 |
Current income taxes: |  |  |  |  |  |  |  |  |
Federal |  | $ | - |  |  | $ | (1.1 | ) |  | $ | 1.7 |
State |  |  | 3.7 |  |  |  | 2.2 |  |  |  | 3.7 |
Total current |  |  | 3.7 |  |  |  | 1.1 |  |  |  | 5.4 |
Deferred income taxes: |  |  |  |  |  |  |  |  |
Federal |  |  | (9.6 | ) |  |  | — |  |  |  | 3.6 |
State |  |  | (1.1 | ) |  |  | 0.1 |  |  |  | 0.1 |
Total deferred |  |  | (10.7 | ) |  |  | 0.1 |  |  |  | 3.7 |
Income tax expense (benefit) |  | $ | (7.0 | ) |  | $ | 1.2 |  |  | $ | 9.1 |
Actual income tax expense (benefit) differed from the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes as follows:
|  | Year Ended December 31, |
|  | 2024 |  |  | 2023 |  |  | 2022 |
Income (loss) before income taxes |  | $ | (214.8 | ) |  | $ | (58.0 | ) |  | $ | 351.8 |
Statutory rate |  | 21% |  |  | 21% |  |  | 21% |
Federal income tax expense (benefit) at statutory rate |  |  | (45.1 | ) |  |  | (12.2 | ) |  |  | 73.9 |
State taxes, net of federal benefit |  |  | (0.8 | ) |  |  | 0.8 |  |  |  | 9.5 |
Permanent items |  |  | 3.4 |  |  |  | 7.2 |  |  |  | 13.6 |
Other |  |  | 3.6 |  |  |  | (1.3 | ) |  |  | (3.2 | )
Non-controlling interest |  |  | - |  |  |  | (10.7 | ) |  |  | (59.9 | )
Business combination adjustment |  |  | - |  |  |  | (8.3 | ) |  |  | - |
Valuation allowance |  |  | 31.9 |  |  |  | 25.7 |  |  |  | (24.8 | )
Income tax expense (benefit) |  | $ | (7.0 | ) |  | $ | 1.2 |  |  | $ | 9.1 |
Effective tax rate |  |  | 3.3 | % |  |  | -2.1 | % |  |  | 2.6 | %
The Company’s effective tax rate was generally lower than the federal corporate income tax rate of 21% due to changes in the valuation allowance against our deferred tax assets for all periods. Additionally, our effective tax rate was impacted in 2023 and 2022 because income allocated to our Class B shareholders before the conversion of our Class B common stock to Class A common stock was not subject to tax on the Company’s tax returns. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
|  | December 31, |
|  | 2024 |  |  | 2023 |
Deferred tax assets: |  |  |  |  |  |
Net operating loss carryforward |  | $ | 147.1 |  |  | $ | 162.9 |
Interest carryforward |  |  | 31.4 |  |  |  | - |
Tax receivable agreement |  |  | - |  |  |  | 74.1 |
Lease liability |  |  | 39.8 |  |  |  | - |
Intangible assets and goodwill |  |  | 198.6 |  |  |  | 8.0 |
Other |  |  | 31.8 |  |  |  | 10.4 |
Gross deferred tax assets |  |  | 448.7 |  |  |  | 255.4 |
Valuation allowance |  |  | (139.2 | ) |  |  | (91.1 | )
Total deferred tax assets |  |  | 309.5 |  |  |  | 164.3 |
Deferred tax liabilities: |  |  |  |  |  |
Property, Plant & Equipment |  |  | (280.2 | ) |  |  | - |
Investment in ProFrac Holdings, LLC |  |  | - |  |  |  | (156.5 | )
Right-of-use asset and other |  |  | (44.2 | ) |  |  | (7.5 | )
Total deferred tax liabilities |  |  | (324.4 | ) |  |  | (164.0 | )
Net deferred tax assets (liabilities) |  | $ | (14.9 | ) |  | $ | 0.3 |
As of December 31, 2024, the Company had approximately $2.4 billion of federal net operating loss ("NOL") carryforwards, of which $1.5 billion will expire on various dates between 2032 and 2037 with the remaining losses carried forward indefinitely. The Company's NOLs were acquired through its acquisition of FTSI and USWS during 2022. FTSI filed for bankruptcy protection on September 22, 2020 and upon emergence on November 19, 2020 elected Section 382(l)(5) with respect to its tax attributes, including NOLs. Section 382(l)(5) completely limits utilization of NOLs if a company making the election experiences a second "ownership change" under Section 382 within a two year period. FTSI experienced a second "ownership change" when it was acquired by the Company on March 2, 2022, within the two year period after it elected Section 382(l)(5). As such, $1.9 billion of federal NOLs are fully limited and unable to be utilized in the future. Of the Company's remaining $452.0 million federal NOLs, $413.9 million are also subject to limitation under Section 382. The Company also has $779.5 million of state NOLs, of which $571.9 million will expire on various dates between 2032 and 2043 with the remaining losses carried forward indefinitely. NOLs that are fully limited under Section 382(l)(5) were $521.5 million and of the remaining $257.9 million state NOLs, $232.8 million are subject to limitation under Section 382. We have established a valuation allowance for all deferred tax assets that will not be realized by future taxable income generated by our deferred tax liabilities. Deferred tax assets related to our U.S. federal and state tax net operating losses are still available to us to offset future taxable income, subject to limitations in the event of a change of control under Section 382 of the Internal Revenue Code. At December 31, 2024, we had not incurred such an ownership change. At each reporting date, we consider all available positive and negative evidence to evaluate whether our deferred tax assets are more likely than not to be realized. A significant piece of negative evidence that we consider is whether we have incurred cumulative losses (generally defined as losses before income taxes) in recent years. Such negative evidence weighs heavily against other more subjective positive evidence such as our projections for future taxable income. We noted that for the three years ended December 31, 2024, we recorded cumulative income before income taxes of $79.0 million as a result of income reported in 2022. Notwithstanding this three-year cumulative income, we concluded that a valuation allowance was still required at December 31, 2024, because it is more likely than not that the deferred tax assets will not be realized. We based this conclusion on the positive and negative evidence discussed below. The primary positive evidence we noted was: • Our income before income taxes in 2022 was $351.8 million. The primary negative evidence we noted was: • In 2024 we recorded a loss before income taxes of $214.8 million. • In 2023 we recorded a loss before income taxes of $58.0 million. • 2022 was the first profitable year for the Company since 2018. • The forecasts of our results and the consensus forecasts of the hydraulic fracturing industry have been historically volatile due to the up-and-down cycles experienced by the industry. • The price of oil and natural gas has fluctuated significantly over the past three years. A significant decrease in the price of oil or natural gas has historically resulted in a decrease in our customers’ activity levels and a corresponding decrease in our earnings. • We do not have prudent and feasible tax-planning strategies available to us to realize deferred tax assets. If we generate income before income taxes in future periods, we may be able to recognize a portion of our net deferred tax assets in future periods. We will adjust the valuation allowance based on our evaluation of new information as it becomes available and new circumstances as they occur. A change in our assessment could cause a decrease to the valuation allowance, which could materially impact our results of operations. At December 31, 2024, we had no liability for uncertain tax positions. We recognize accrued interest and penalties related to any uncertain tax positions as part of income tax expense. At December 31, 2024, we had no accrued interest expense associated with unrecognized tax benefits. Interest expense associated with unrecognized tax benefits was zero for all periods presented. ProFrac LLC was obligated to make cash distributions to the redeemable noncontrolling interest holders to fund their respective income tax liabilities relating to their share of the income of ProFrac LLC. In the fourth quarter of 2022, the Company paid a distribution of $8.0 million to the redeemable noncontrolling interest holders. The revised estimate for the full year liability to these shareholders was $2.8 million. As of December 31, 2022, we recorded the $5.3 million overpayment of the distribution in prepaid expenses and other current assets on our consolidated balance sheets to be offset against future tax distributions. In connection with the conversion of our Class B common stock to Class A common stock, ProFrac LLC will no longer be required to make tax distributions to our former Class B shareholders. As a result, we recorded the $5.3 million overpayment as an equity transaction as of December 31, 2023. ProFrac Holding Corp and its U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. Our income tax returns, along with income tax returns for our acquired subsidiaries, are currently subject to examination in federal and state jurisdictions primarily for tax years from 2020-2023. Tax Receivable Agreement In connection with our initial public offering, ProFrac Corp. entered into a tax receivable agreement (the “TRA”) with certain holders of limited liability company interests in ProFrac LLC (the “TRA Holders”). The TRA generally provides for payment by ProFrac Corp. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that ProFrac Corp. actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain increases in tax basis that occur as a result of ProFrac Corp.'s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s ProFrac LLC units in connection with the initial public offering or the exercise of the Redemption Right (as defined in the TRA) or the Call Right (as defined in the TRA), and (ii) imputed interest deemed to be paid by ProFrac Corp. as a result of, and additional tax basis arising from, any payments ProFrac Corp. makes under the TRA. Payments will generally be made under the TRA as ProFrac Corp. realizes actual cash tax savings from the tax benefits covered by the TRA. As a result of our IPO and the conversion of all our Class B common stock to Class A common stock (see “Note 1. Organization and Description of Business”) and the tax effects of these transactions, we recorded a $82.9 million noncurrent TRA liability. The recognition of the TRA liability was recorded as an equity transaction because the holders of Class B common stock and their affiliates control us through their Class A common stock holdings. As of December 31, 2024, the current liability for our TRA obligation was an additional $3.3 million.

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