Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

Note 12  Income Taxes

The Company is taxed as a corporation for income tax purposes and is subject to federal, state, and local taxes on the income allocated to it from Enfusion Ltd. LLC  based upon the Company’s economic interest in Enfusion Ltd. LLC. The Company is the sole managing member of Enfusion Ltd. LLC and, as a result, consolidates the financial results of Enfusion Ltd. LLC.

Enfusion Ltd. LLC. is a limited liability company taxed as a partnership for income tax purposes. Enfusion Ltd. LLC does not pay any federal income taxes, as income or loss is included in the tax returns of the individual members. Additionally, certain wholly-owned entities taxed as corporations are subject to federal, state, and foreign income taxes in the jurisdictions in which they operate, and accruals for such taxes are included in the Consolidated Financial Statements. For periods prior to the IPO, the Company’s taxes represent those of Enfusion Ltd. LLC.

The components of income (loss) before income taxes were as follows (in thousands):

	Year Ended December 31,
	2022		2021		2020
U.S.	$	(16,201)	$	(279,990)	$	3,130
Foreign		4,012	(1,673)		1,364
Total	$	(12,189)	$	(281,663)	$	4,494

The income before income taxes above includes the pre- and post-IPO periods for the year ended  December 31, 2021.

Prior to the IPO, the Company, through its subsidiary, Enfusion Ltd. LLC, was structured as a partnership and therefore, was primarily subject to foreign income taxes and generally not subject to U.S. income taxes. As a result of the Reorganization Transactions, the Company is now taxed as a corporation and subject to U.S. federal, state, local and foreign taxes. Significant components of income tax expense (benefit) were as follows (in thousands):

	Year Ended December 31,
	2022		2021		2020
Current
U.S. Federal	$	-	$	-	$	-
State & Local		-		-		-
Foreign		1,347		228		433
Total Current Income Tax Expense		1,347		228		433
Deferred
U.S. Federal		-		-		-
State & Local		-		-		-
Foreign		(273)		351		-
Total Deferred Income Tax (Benefit) Expense		(273)		351		-
Total	$	1,074	$	579	$	433

A reconciliation of income taxes computed at the U.S. federal statutory income tax rate of 21% to our income tax (expense) benefit was as follows:

	2022			2021			2020
At U.S. Federal statutory tax rate		21.00	%		21.00	%		21.00	%
State Tax, Net of Federal Benefit		3.14	%		4.28	%		-	%
Noncontrolling Interest		(8.85)	%		(9.20)	%		-	%
Foreign Branch Taxes		(8.24)	%		(0.28)	%		9.64	%
Equity Based Compensation		(10.63)	%		(2.49)	%		-	%
Foreign Rate Differential		0.48	%		0.04	%		(1.14)	%
Valuation Allowance		50.56	%		(14.51)	%		-	%
Change in Tax Rates		(59.22)	%		-	%		-	%
Pass-through Loss (Income)		-	%		0.91	%		(19.86)	%
Return to Provision		4.03	%		0.08	%		-	%
Other		(1.08)	%		(0.04)	%		-	%
Total		(8.81)	%		(0.21)	%		9.64	%

The Company’s effective tax rate for the years ended December 31, 2022, 2021, and 2020 was (8.81)%, (0.21)%, and 9.64%, respectively.  The most significant items impacting the effective tax rate are explained below.

Pass-through Loss (Income)

Prior to the Reorganization Transactions, Enfusion Ltd. LLC was the reporting entity, which is treated as a flow-through entity for U.S. tax purposes. The income or losses generated are generally not taxed at the Enfusion Ltd. LLC level and instead flow through to its various members. The U.S. federal tax impact of the pre-tax book income attributable to Enfusion Ltd. LLC prior to the completion of the IPO was $2.6 million, and $0.9 million for the years ended December 31, 2021 and 2020.

Noncontrolling Interest

The Company’s sole material asset is a financial interest in Enfusion Ltd. LLC. While the Company consolidates Enfusion Ltd. LLC for financial reporting purposes, the Company will only be taxed on (benefit from) its share of earnings (losses) of Enfusion Ltd. LLC not attributed to the noncontrolling interest holders. Since noncontrolling interest holders will continue to bear (benefit from) their share of income tax expense (benefit) on its allocable earnings (losses) of Enfusion Ltd. LLC, that share of income tax expense (benefit) is not reported by the Company in its consolidated financial statements. The U.S. federal tax benefit not attributable to the Company for the years ended December 31, 2022 and 2021 was $1.1 million and $25.9 million, respectively.

Equity-Based Compensation

As a result of the Reorganization Transactions, a significant portion of the Company’s certain equity-based compensation expenses will be allocated to the noncontrolling interest holders and therefore will not be deductible to the Company. The remaining portion of these expenses will be subject to the tax deduction limits as established by the U.S. tax law in respect of the executive compensation. The U.S. federal tax impact of the non-deductible equity-based compensation for the years ended December 31, 2022 and 2021 was $1.3 million and $2.5 million, respectively.

Valuation Allowance

The Company’s net deferred tax benefit (expense) for the years ended December 31, 2022 and 2021 of $(6.2) million and $40.8 million was fully offset by the valuation allowance recorded (released) in the consolidated statement of operations for each respective year.

Foreign Branch Taxes

The Company has foreign operations that are treated as branches for U.S. tax purposes and are also subject to income taxes in those foreign jurisdictions. For the years ending December 31, 2022, 2021 and 2020 the Company recorded $1.0 million, $0.6 million, and $0.4 million in foreign income taxes related to the pre-tax income of its branches.

Return to Provision

For the years ended December 31, 2022 and 2021 the Company recorded a tax benefit of $0.5 million and $0.2 million, respectively in relation to its filed or expected to be filed U.S. and foreign income tax returns. These true-up adjustments are attributable to actual results in the Company’s tax filings as compared to the estimates included in our previously issued Consolidated Financial Statements.

Change in Tax Rates

As of December 31, 2022, the Company reduced its deferred tax assets by $7.2 million to reflect a decrease in the estimated U.S. state tax rate caused by a change in the overall mix of our U.S. earnings by state.

The components of deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2022		2021
Deferred Tax Assets
Investment in Enfusion Ltd. LLC	$	86,117	$	80,124
Equity Based Compensation		37,912		38,362
Net Operating Losses		9,358		5,475
Other		794		565
Total Deferred Tax Assets		134,181		124,526
Valuation Allowance		(133,689)		(124,526)
Total Deferred Tax Assets Net of Valuation Allowance		492		-
Deferred tax liabilities		-		-
Property, Plant, and Equipment		(77)		(351)
Total Deferred Tax Liabilities		(77)		(351)
Net Deferred Tax Assets	$	415	$	(351)

The Company’s deferred tax assets are comprised primarily of basis difference in Enfusion Ltd. LLC, equity-based compensation expense and tax attribute carryforwards. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to utilize the deferred tax assets on the Company’s income tax returns. Management determined that its deferred tax assets are not more likely than not going to be realized due to the Company’s three-year cumulative loss position and the generation of future taxable income is uncertain. Considering this and other factors, the Company recognized a full valuation allowance of $133.6 and $124.5 million as of December 31, 2022 and 2021, respectively. The total amount of valuation allowance recorded to additional paid-in capital as a result of the Reorganization Transactions, IPO and the Company’s purchase of additional Enfusion Ltd. LLC units during the year ended December 31, 2021 was $83.1 million.

As of December 31, 2022, the Company had U.S. federal net operating losses of $33.2 million which can be carried forward indefinitely. The Company had state net operating losses of $31.2 million that expire between 2041 and 2042.

As of December 31, 2022, the Company is not indefinitely reinvested on undistributed earnings from its foreign operations. Due to the Company's structure, the foreign operations do not qualify for the indefinite reinvestment exceptions under ASC 740-30 as the earnings from the foreign operations are subject to U.S. taxation. However, the exception may still apply to foreign withholding taxes due to dividend distributions of earnings from the Company's foreign affiliates. The Company has no plans to make distributions from its foreign operations in the future and, therefore, a deferred tax liability has not been recognized. A determination of the unrecognized deferred taxes is not practicable.

A summary of the Company’s uncertain tax positions is as follows:

	Year Ended December 31,
	2022		2021		2020
Beginning balance	$	119	$	-	$	-
Increases for tax positions related to the current year		-		30		-
Increases (decreases) for tax positions of prior years		-		89		-
Ending balance	$	119	$	119	$	-
Interest and penalties	$	65	$	65	$	-

Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2022, we accrued $65 thousand of interest and penalties.

We can be subject to routine income tax examinations in the U.S. federal, state, local and foreign jurisdictions for tax years 2017 and forward. At December 31, 2022, the Company is not under income tax audit in any of the jurisdictions in which it operates.

CARES Act

On March 27, 2020, the President signed the CARES Act to provide emergency relief related to the COVID-19 pandemic. The CARES Act contains federal income tax provisions which, among other things; (i) increases the amount of interest expense that businesses are allowed to deduct by increasing the adjusted taxable income limitation from 30% to 50% for tax years that begin in 2019 and 2020; (ii) permits businesses to carry back to each of the five tax years net operating losses arising from tax years beginning after December 31, 2017 and before January 1, 2021; and (iii) temporarily removes the 80% limitation on net operating losses until tax years beginning after 2020.

Tax Receivable Agreement

The Company expects to obtain an increase in its share of the tax basis in the net assets of Enfusion Ltd. LLC when Enfusion Ltd. LLC units are redeemed from or exchanged by the Pre-IPO common unit holders. The Company intends to treat any redemptions and exchanges of Enfusion Ltd. LLC units as direct purchases of Enfusion Ltd. LLC units for U.S. income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to U.S. federal and state 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.

In connection with the IPO, the Company entered into the Tax Receivable Agreement with Enfusion Ltd. LLC, the Continuing Equity Owners and the Blocker Shareholders that will provide for the payment by the Company to the Continuing Equity Owners and the Blocker Shareholders of 85% of the amount of tax benefits, if any, that the Company actually realizes (or in some circumstances is deemed to realize) as a result of (1) the Company’s allocable share of existing tax basis acquired in connection with the Reorganization Transactions (including the Blocker Company’s share of existing tax basis) and increases to such allocable share of existing tax basis; (2) increases in tax basis resulting from (a) the Company’s purchase of LLC Interests directly from Enfusion Ltd. LLC and the partial redemption of LLC Interests by Enfusion Ltd. LLC, (b) future redemptions or exchanges (or deemed exchanges in certain circumstances) of LLC Interests for Class A common stock or cash, and (c) certain distributions (or deemed distributions) by Enfusion Ltd. LLC; and (3) certain additional tax benefits arising from payments made under the Tax Receivable Agreement. The Company may benefit from the remaining 15% of any tax benefits that the Company actually realizes.

In the year ended December 31, 2022, the Company purchased an aggregate of 4,272,204 Enfusion Ltd. LLC units in connection with the exchange of those units by the Pre-IPO common unit holders and retirement of six Class B common shares, which resulted in an increase of $48.0 million in the tax basis of the net assets of Enfusion Ltd. LLC that would be subject to the provisions of the Tax Receivable Agreement in the years ended December 31, 2021 and 2022, respectively.

As of December 31, 2022 and 2021, the Company has not recorded a liability under the Tax Receivable Agreement related to the tax benefits originating from the Reorganization Transactions, IPO and subsequent purchase of Enfusion Ltd. LLC units as it is not probable that the Company will realize such tax benefits.  To the extent we had determined that we would have been able to realize the tax benefits associated with the basis adjustments, we would have recorded a liability under the Tax Receivable Agreement of $83.2 million and $74.7 million as of December 31, 2022 and 2021, respectively.

The amounts payable under the Tax Receivable Agreement will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of the Company in the future. Should the Company determine that the Tax Receivable Agreement liability be considered probable at a future date based on new information, any changes will be recorded within income tax expense (benefit) at that time.