|3 Months Ended|
Mar. 31, 2023
|Income Tax Disclosure [Abstract]|
NOTE 11. INCOME TAXES
The Predecessors 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, the Predecessors were not required to account for U.S. federal income taxes in the unaudited condensed consolidated financial statements.
In connection with our initial public offering in May 2022, we 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 its income taxes under the asset and liability method for periods subsequent to May 17, 2022.
We record income taxes for interim periods based on an estimated annual effective tax rate. The estimated annual effective rate is recomputed on a quarterly basis and may fluctuate due to changes in forecasted annual operating income, positive or negative changes to the valuation allowance for net deferred tax assets and changes to actual or forecasted permanent book to tax differences.
Our effective tax rate for the three months ended March 31, 2023 was 10.1%. The difference between our effective tax rate and the federal statutory rate is related to the income that is earned within the financial statement consolidated group that is not subject to tax within the financial statement consolidated group and changes in the valuation allowance on our net deferred tax assets.
We have established a valuation allowance on substantially all of our net deferred tax assets. 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. As of March 31, 2023, we concluded that a valuation allowance was still required because it was more likely than not that our deferred tax assets would not be realized.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef