Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

We and our subsidiaries, CenStar and Verde Energy USA, Inc. ("Verde Corp") are each subject to U.S. federal income tax as corporations. CenStar and Verde Corp file consolidated tax returns in jurisdictions that allow combined reporting. Spark HoldCo and its subsidiaries, with the exception of CenStar and Verde Corp, are treated as flow-through entities for U.S. federal income tax purposes, and, as such, are generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to their taxable income is passed through to their members or partners. Accordingly, we are subject to U.S. federal income taxation on our allocable share of Spark HoldCo's net U.S. taxable income.

In our financial statements, we report federal and state income taxes for our share of the partnership income attributable to our ownership in Spark HoldCo and for the income taxes attributable to CenStar and Verde Corp. Net income attributable to non-controlling interest includes the provision for income taxes related to CenStar and Verde Corp.

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the tax bases of the assets and liabilities. We apply existing tax law and the tax rate that we expect to apply to taxable income in the years in which those differences are expected to be recovered or settled in calculating the deferred tax assets and liabilities. Effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period of the tax rate enactment. A valuation allowance is recorded when it is not more likely than not that some or all of the benefit from the deferred tax asset will be realized.

The provision for income taxes for the years ended December 31, 2023, 2022, and 2021 included the following components:

(in thousands)	2023		2022		2021
Current:
Federal	$	4,028	$	3,045	$	381
State	1,960		1,476		(622)
Total Current	5,988		4,521		(241)
Deferred:
Federal	4,031		1,505		4,274
State	1,123		457		1,233
Total Deferred	5,154		1,962		5,507
Provision for income taxes	$	11,142	$	6,483	$	5,266

The effective income tax rate was 30%, 37%, and (3,582)% for the years ended December 31, 2023, 2022, and 2021, respectively. The following table reconciles the income tax benefit that would result from application of the statutory federal tax rate, 21%, 21%, and 21% for the years ended December 31, 2023, 2022, and 2021 respectively, to the amount included in the consolidated statement of operations:

(in thousands)	2023		2022		2021
Expected provision at federal statutory rate	$	7,822	$	3,714	$	(31)
Increase (decrease) resulting from:
Non-controlling interest	(2,090)		(963)		3,475
Preferred Stock dividends	1,596		1,198		1,264
State income taxes, net of federal income tax effect	2,671		1,918		1,745
Prior year tax adjustments	(131)		148		(996)
Outside Tax basis Adjustment	1,220		225		(282)
Penalties	—		238		(158)
Stock conversion	—		—		1,486
Rate differential on loss carryback	—		—		(1,157)
Other	54		5		(80)
Provision for income taxes	$	11,142	$	6,483	$	5,266

Total income tax expense for the years ended December 31, 2023, 2022 and 2021 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income primarily due to state income taxes and the impact of permanent differences between book and taxable income, most notably the income attributable to non-controlling interest, which gets taxed at the non-controlling interest partner level. In addition, in 2021 the Company recognized an effective tax rate benefit from the carry-back of a net operating loss due to higher statutory rate in the carry-back years.

The components of our deferred tax assets as of December 31, 2023 and 2022 are as follows:

(in thousands)	2023		2022
Deferred Tax Assets:
Investment in Spark HoldCo	$	12,241	$	16,931
Derivative Liabilities	405		333
Fixed Assets and Intangibles	2,047		2,919
Other	685		552
Total deferred tax assets	$	15,378	$	20,735
Deferred Tax Liabilities:
Other	(96)		(298)
Total deferred tax liabilities	$	(96)	$	(298)
Total deferred tax assets/liabilities	$	15,282	$	20,437

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and makes certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical earnings and losses, current industry trends, and our outlook for future years. We believe it is more likely than not that our deferred tax assets will be utilized, and accordingly have not recorded a valuation allowance on these assets.

The tax years 2017 through 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject to income tax.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2023 and 2022 there was no liability, and for the years ended December 31, 2023, 2022 and 2021, there was no expense recorded for interest and penalties associated with uncertain tax positions or unrecognized tax positions. Additionally, the Company does not have unrecognized tax benefits as of December 31, 2023 and 2022.