Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
As described in Management's Discussion and Analysis, we completed a business combination on February 9th, 2022 and as a result, Authentic Brands became a subsidiary of BRC Inc. Authentic Brands is, and has been since the business combination, treated as a flow-through entity for U.S. federal income tax purposes and as such, has generally not been subject to U.S. federal income tax at the entity level. BRC Inc. did not engage in any operations prior to the business combination. This section describes the operations of the Company, operating under Authentic Brands prior to the Business Combination, and contains the financial results of Authentic Brands for the period before the Business Combination through December 31, 2021. Accordingly, the historical results of operations and other financial information set forth in this Annual Report do not include any material provisions for U.S. federal income tax. Following the Company's initial public offering, BRC Inc. is taxed as a corporation and is subject to U.S. federal, state, and local income taxes with respect to its allocable share of any taxable income or loss of Authentic Brands, as well as any stand-alone income or loss generated by the Company.
Net income (loss) before income taxes was $(337,677), $(13,667) and $4,506 for the years ended December 31, 2022, 2021 and 2020, respectively. The Company had an income tax expense of $367, $178 and $185 for the year ended December 31, 2022, 2021 and 2020, respectively.
The components of the provision for income tax (benefit) provision are as follows:

December 31,
2022 2021 2020
Current expense
Federal $ —  —  — 
State 367  178  185 
Total current expense 367  178  185 
Deferred expense
Federal —  —  — 
State —  —  — 
Total deferred expense —  —  — 
Total income tax (benefit) provision $ 367  $ 178  $ 185 

The Company recognized a tax expense of $367 on pre-tax book loss of $337,677. The Company has determined that its deferred tax assets require a full valuation allowance. As a result, the only tax expense recognized in the Company’s financials relate to state taxes at the Authentic Brands level.
Reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rate is as follows:

December 31, 2022 December 31, 2021 December 31, 2020
Amount Rate Amount Rate Amount Rate
Expected U.S. federal income taxes at statutory rate $ (70,912) 21.00  % $ (2,870) 21.00  % $ 946  21.00  %
State Taxes (72) 0.02  % 178  (1.30) % 185  4.10  %
Effect of Business Combination —  —  —  —  —  — 
Loss attributable to non-controlling interests 54,050  (16.00) % —  —  —  — 
Valuation allowance 17,280  (5.12) % —  —  —  — 
Effect due to LLC flow-through structure —  —  2,870  (21.00) % (946) (21.00) %
Other 21  (0.01) % —  —  —  — 
Income tax expense (benefit) $ 367  (0.11) % $ 178  (1.30) % $ 185  4.10  %
The tax effects of cumulative temporary differences that give rise to significant deferred tax assets and deferred tax liabilities are presented below:
December 31, December 31, December 31,
2022 2021 2020
Deferred tax assets:
Investment in partnership $ 78,801  $ —  $ — 
Net operating losses 5,212  —  — 
Other 71  —  — 
Total deferred tax assets before valuation allowance 84,084  —  — 
Less: valuation allowance (84,084) —  — 
Deferred tax assets - net of valuation allowance —  —  — 
Deferred tax liabilities:
—  —  — 
Total deferred tax liabilities —  —  — 
Deferred tax (liabilities) assets, net $ —  $ —  $ — 
As of December 31, 2022 the Company had federal net operating loss carry forwards of $24,189. Federal losses can be carried forward indefinitely. The company also has losses in various states that will begin to expire in 2037.
We recognize DTAs to the extent we believe these assets are more likely than not to be realized. In making such a determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. A valuation allowance is provided if it is determined that it is more likely than not that the DTA will not be realized. During the year ended December 31, 2022, management performed an assessment of the recoverability of DTAs. Management determined, based on the accounting standards applicable to such assessment, that there was sufficient negative evidence as a result of the Company’s cumulative losses to conclude it was more likely than not that its DTAs would not be realized and has recorded a full valuation allowance of $84,084 against its DTAs.
Tax Receivable Agreement
As part of the Business Combination, the Company entered into Tax Receivable Agreements with certain shareholders that requires the Company to pay to such shareholders approximately 85% of the tax savings the Company realizes as a result of (i) increases in tax basis in Authentic Brands’ assets resulting from the redemption of existing preferred units of Authentic Brands, (ii) increase in tax basis resulting from the redemption of Common Units for consideration paid pursuant to the Amended and Restated LLC Agreement of Authentic Brands, (iii) increases in tax basis resulting from future exchanges of Common Units for shares of the Company's stock or cash pursuant to the Amended and Restated LLC Agreement of Authentic Brands, (iv) pre-existing tax attributes of the Blocker as well as certain (v) other tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Unit exchanges, and the resulting amounts we are likely to pay out to Unitholders of Authentic Brands pursuant to the Tax Receivable Agreement; however we estimate that such payments may be substantial. The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors, including the timing of exchanges by the Unitholders of Authentic Brands, the amount of gain recognized by such Unitholders of Authentic Brands, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.
The Company has determined that it will record the Tax Receivable Agreement liability when probable and estimable. Given the uncertainty regarding the potential payments such that the timing is not fixed or determinable, any Tax Receivable Agreement liability will be recorded on an undiscounted basis consistent with general practice. The Company's Tax Receivable Agreement payments generally relate directly to DTAs that have been recorded in its financial statements subject to a full valuation allowance. These payments will relate to IRC §743(b) adjustments from the business combination, future exchanges, and Blocker basis. In addition, the Company will be required to make Tax Receivable Agreement payments for tax savings related to other tax attributes discussed above. In no circumstance, will the Company be required to make a Tax Receivable Agreement payment without a realized tax savings.
The Company has reviewed its DTAs and has determined that it is not more likely than not that it will be able to utilize them. Accordingly, it has established a full valuation allowance against its DTAs. In addition, Authentic Brands has 12
quarters of cumulative pre-tax losses adjusted for permanent items prior to consideration of any tax attributes covered by the Tax Receivable Agreement. The Company's only source of taxable income is Authentic Brands. As a result of the full valuation allowance against its DTAs, and Authentic Brands historic losses, the Company is not recording a Tax Receivable Agreement liability for the year ended December 31, 2022.
Uncertain Tax Positions
An entity shall initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The term more likely than not means a likelihood of more than 50 percent. The Company started filing tax returns for the year ended December 31, 2020 and subject to examination by taxing authorities for U.S. federal and state income tax purposes. The Company did not engage in any operations prior to the Business Combination. Authentic Brands is treated as a partnership for U.S. federal and state income tax purposes and its tax returns are subject to examination by taxing authorities. Authentic Brands has filed income tax returns for years through December 31, 2021. These returns are subject to examination by the taxing authorities in the respective jurisdictions, generally for three or four years after they were filed. The Company has reviewed the tax profile to assess and determine whether any new or existing uncertainties exist. Based on the Company's analysis of tax positions taken on income tax returns filed, no uncertain tax positions existed as of December 31, 2022.
Although the outcome of open tax audits is uncertain, in management’s opinion, adequate provisions for income taxes have been made. If actual outcomes differ materially from these estimates, they could have a material impact on our financial condition and results of operations. Differences between actual results and assumptions or changes in assumptions in future periods are recorded in the period they become known. To the extent additional information becomes available prior to resolution, such accruals are adjusted to reflect probable outcomes.
No interest or penalties were recognized in the consolidated financial statements. To the extent we recognize interest expense and penalties related to income tax matters in the future, we will recognize the amounts in pre-tax income (loss) on our consolidated financial statements.