Repay Holdings Corporation is taxed as a corporation and is subject to paying corporate federal, state and local taxes on the income allocated to it from Hawk Parent, based upon Repay Holding Corporation’s economic interest held in Hawk Parent, as well as any stand-alone income or loss it generates. Hawk Parent is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Hawk Parent is not subject to U.S. federal and certain state and local income taxes. Hawk Parent’s members, including Repay Holdings Corporation, are liable for federal, state and local income taxes based on their allocable share of Hawk Parent’s pass-through taxable income.

	Year ended December 31, 2020	July 11, 2019 to December 31, 2019	January 1, 2019 to July 10, 2019	Year ended December 31, 2018
	(Successor)		(Predecessor)
Domestic	$(58,440,309)	$(36,281,944)	$(23,668,078)	$10,537,443
Foreign	(456,747)	(269,721)	(74,452)	—
Income (loss) before income tax expense	$(58,897,056)	$(36,551,665)	$(23,742,530)	$10,537,443

	Year ended December 31, 2020	July 11, 2019 to December 31, 2019	January 1, 2019 to July 10, 2019	Year ended December 31, 2018
	(Successor)		(Predecessor)
Current expense
Federal	$ —	$ —	$ —	$ —
State	—	—	—	—
Foreign	—	—	—	—
Total current expense (benefit)	$ —	$ —	$ —	$ —
Deferred expense
Federal	$(10,523,778)	$(4,343,013)	$ —	$ —
State	(1,708,969)	(575,152)	—	—
Foreign	(125,278)	(72,824)	—	—
Total deferred benefit	(12,358,025)	(4,990,989)	—	—
Income tax benefit	$(12,358,025)	$(4,990,989)	$ —	$ —

A reconciliation of the United States statutory income tax rate to the Company’s effective income tax rate is as follows for the years indicated:

	Year ended December 31, 2020	July 11, 2019 to December 31, 2019	January 1, 2019 to July 10, 2019	Year ended December 31, 2018
	(Successor)		(Predecessor)
Federal income tax expense	21.0%	21.0%	0.0%	0.0%
State taxes, net of federal benefit	2.9%	1.6%	0.0%	0.0%
Income attributable to noncontrolling interest	(4.0%)	(8.6%)	0.0%	0.0%
Excess tax benefit related to share-based compensation	0.8%	0.5%	0.0%	0.0%
Other	0.3%	(0.8%)	0.0%	0.0%
Total deferred benefit	21.0%	13.7%	0.0%	0.0%

The Company’s effective tax rate was 21.0% and 13.7% for the year ended December 31, 2020 and the period from July 11, 2019 to December 31, 2019, respectively. The comparison of the Company’s effective tax rate to the U.S. statutory tax rate of 24% was primarily influenced by the fact that the Company is not liable for the income taxes on the portion of Hawk Parent’s earnings that are attributable to noncontrolling interests. The results for the Predecessor do not reflect income tax expense because, prior to the closing of the Business Combination, the consolidated Hawk Parent was treated as a partnership for U.S. federal and most applicable state and local income tax purposes and was not subject to corporate tax.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Details of the Company's deferred tax assets and liabilities are as follows:

	December 31, 2020	December 31, 2019
Deferred tax assets
Tax Credits	$522,081	$52,314
Section 163(j) Limitation Carryover	250,095	719,773
Acquisition Costs	352,291	378,386
Federal Net Operating Losses	8,834,924	3,682,201
State Net Operating Losses	1,264,059	526,606
Foreign Net Operating Losses	202,517	74,444
Other Assets	2,997,426	10,320
Partnership basis tax differences	154,253,345	—
Total deferred tax asset	168,676,738	5,444,044
Valuation allowance	(33,339,509)	(5,799,118)
Total deferred tax asset, net of valuation allowance	135,337,229	(355,074)
Deferred tax liabilities
Partnership basis tax differences	—	(413,261)
Total deferred tax liabilities	—	(413,261)
Net deferred tax liabilities	$135,337,229	$(768,335)

As a result of the Follow-on Offerings, warrant exercises and Post-Merger Repay Unit exchanges during the year ended December 31, 2020, the Company recognized an additional deferred tax asset (“DTA”) and offsetting deferred tax liability (“DTL”) in the amount of $27.5 million, compared to $5.8 million as a result of the Merger during the year ended December 31, 2019, to account for the portion of the Company’s outside basis in the partnership interest that it will not recover through tax deductions, a ceiling rule limitation arising under Internal Revenue Code (the “Code”) sec. 704(c). As the ceiling rule causes taxable income allocations to be in excess of 704(b) book allocations the DTL will unwind, leaving only the DTA, which may only be recovered through the sale of the partnership interest in Hawk Parent. The Company has concluded, based on the weight of all positive and negative evidence, that all of the DTA associated with the ceiling rule limitation is not likely to be realized as of December 31, 2020. As such, a 100% valuation allowance was recognized.

As of December 31, 2020, the Company has a tax effected federal net operating loss carryforward of approximately $8.8 million, state net operating loss carryforwards of approximately $1.3 million, and a tax effected foreign net operating loss carryforwards of approximately $0.2 million, which will be available to offset future income taxes. The federal and foreign net operating loss carryforwards have an indefinite life. The state net operating loss carryforwards will begin to expire between 2031 and 2035. Based on the weight of all positive and negative evidence, the Company expects that it its more likely than not going to utilize the net operating loss against earnings in future years.

On December 27, 2020, Congress passed, and President Trump signed into law, the Consolidated Appropriations Act, 2021 (the “Act”), which includes certain business tax provisions. The Company does not expect the Act to have a material impact on the Company’s effective tax rate or income tax expense for the year ending December 31, 2021.

Pursuant to our election under Section 754 of the Code, we expect to obtain an increase in our share of the tax basis in the net assets of Hawk Parent when Post-Merger Repay Units are redeemed or exchanged for Class A common stock of Repay Holdings Corporation. The Company intends to treat any redemptions and exchanges of Post-Merger Repay Units as direct purchases for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

On July 11, 2019, the Company entered into a TRA that provides for the payment by the Company of 100% of the amount of any tax benefits realized, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of Hawk Parent resulting from any redemptions or exchanges of Post-Merger Repay Units and from our acquisition of the equity of the selling Hawk Parent members, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the "TRA Payments"). The TRA Payments are not conditioned upon any continued ownership interest in Hawk Parent or Repay. The rights of each party under the TRA other than the Company are assignable. The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable, among other factors.

As of December 31, 2020, the Company had a liability of $229.2 million related to its projected obligations under the TRA, which is captioned as the tax receivable agreement liability in the Company’s consolidated balance sheet. The increase in the TRA liability for the year ended December 31, 2020, was primarily a result of the Unit Purchase Agreements entered into with CC Payment Holdings, L.L.C., an entity controlled by Corsair, pursuant to which the Company acquired 19,564,816 Post-Merger Repay Units held by Corsair. Additionally, other selling members of Hawk Parent exchanged 1,606,647 Post-Merger Repay Units during the year ended December 31, 2020. This resulted in an increase to the Company’s share of the tax basis in the net assets of Hawk Parent.