Income Taxes

12 Months Ended

Feb. 28, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note 6. Income Taxes

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to U.S. federal income tax on the portion of taxable income and gains distributed to stockholders.

The Company owns 100.0% of Saratoga CLO, an exempted company incorporated in the Cayman Islands. For financial reporting purposes, the Saratoga CLO is not included as part of the consolidated financial statements. For U.S. federal income tax purposes, the Company has requested and received approval from the IRS to treat the Saratoga CLO as a disregarded entity. As such, for U.S. federal income tax purposes and for purposes of meeting the RIC qualification and diversification tests, the results of operations of the Saratoga CLO are included with those of the Company to qualify as a RIC. The Company is required to meet certain income and asset diversification tests in addition to timely distributing at least 90% of its investment company taxable income, as defined by the Code. Because U.S. federal income tax regulations differ from U.S. GAAP, distributions as required in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences between these distributions and U.S. GAAP financial results may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for U.S. federal income tax purposes. As of February 28, 2023 and February 28, 2022, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to nondeductible U.S. federal excise and capital gains tax and worthless securities losses (dollars in thousands):

	February 28, 2023			February 28, 2022
Capital in excess of par value	$	16		$	(4,704	)
Total distributable earnings (loss)		(16	)		4,704

For U.S federal income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended February 28, 2023, February 28, 2022 and February 28, 2021 was as follows (dollars in thousands):

	February 28, 2023		February 28, 2022		February 28, 2021
Ordinary income	$	27,313	$	22,033	$	13,747
Capital gains		-		-
Total	$	27,313	$	22,033	$	13,747

For U.S. federal income tax purposes, as of February 28, 2023, the aggregate net unrealized depreciation for all securities was $15.5 million. The aggregate cost of securities for U.S. federal income tax purposes was $1.6 billion.

For U.S. federal income tax purposes, as of February 28, 2022, the aggregate net unrealized appreciation for all securities was $21.2 million. The aggregate cost of securities for U.S. federal income tax purposes was $1.4 billion.

As of February 28, 2023 and February 28, 2022, the components of accumulated losses on a tax basis as detailed below differ from the amounts reflected per the Company’s consolidated statements of assets and liabilities by temporary book/tax differences primarily arising from the consolidation of the Saratoga CLO for U.S federal tax purposes, market discount and original issue discount income, interest income accrual on defaulted bonds, write-off of investments, and amortization of organizational expenditures and partnership interests (dollars in thousands).

	February 28, 2023			February 28, 2022
Post October loss deferred	$	-		$	-
Accumulated capital losses		(1,580	)		(1,143	)
Other temporary differences		1,971			(1,601	)
Undistributed Long Term Gain		-			-
Undistributed ordinary income		19,771			9,897
Unrealized appreciation (depreciation)		(15,500	)		21,283
Total components of accumulated losses	$	4,662		$	28,436

At February 28, 2023, the Company had a short-term capital loss of $0.0 million and a long-term capital loss of $1.6 million, available to offset future capital gains. At February 28, 2023 the company did not utilized any short-term capital losses or long-term capital losses. Post RIC-modernization act losses are deemed to arise on the first day of the fund’s following fiscal year and there is no expiration for these losses.

Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4.0% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the calendar years ended December 31, 2022 and December 31, 2021, the Company did not distribute at least 98% of its ordinary income and 98.2% of its capital gains and accrued $1.1 million and $0.7 million in U.S. federal excise taxes on undistributed taxable income for the years ended February 28, 2023 and February 28, 2022, respectively.

As of February 28, 2023 and 2022, the Company had net long-term capital losses of $1.6 million and $1.1 million.

Management has analyzed the Company’s tax positions taken on U.S. federal income tax returns for all open years (fiscal years 2019- 2022) and has concluded that no provision for uncertain income tax positions is required in the Company’s consolidated financial statements.

SIA-ARC, Inc., SIA-Avionte, Inc., SIA-AX, Inc., SIA-G4, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-PP Inc., SIA-TG, Inc., SIA-TT Inc., SIA-Vector, Inc., and SIA-VR, Inc. each 100% owned by the Company, are each filing standalone C Corporation tax returns for U.S. federal and state tax purposes. As separately regarded entities for tax purposes, these entities are subject to U.S. federal income tax at normal corporate rates. For tax purposes, any distributions by the entities to the parent company would generally need to be distributed to the Company’s shareholders. Generally, such distributions of the entities’ income to the Company’s shareholders will be considered as qualified dividends for tax purposes. The entities’ taxable net income will differ from U.S. GAAP net income because of deferred tax temporary differences arising from net operating losses and unrealized appreciation and deprecation of securities held. Deferred tax assets and liabilities are measured using enacted corporate federal and state tax rates expected to apply to taxable income in the years in which those net operating losses are utilized and the unrealized gains and losses are realized. Deferred tax assets and deferred tax liabilities are netted off by entity, as allowed. The recoverability of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized on the basis of a history of operating losses combined with insufficient projected taxable income or other taxable events in the taxable blockers. In February 2022, SIA-GH, Inc., SIA-TT Inc. and SIA-VR, Inc. received an approved plan of liquidation following the sale of equity held by each of the portfolio companies.

The Company’s V Rental Holdings LLC Class A-1 membership units was sold during the ended February 28, 2022. The entity which held this investment, SIA-VR, Inc. will remain in existence for a period of time until all ongoing indemnification obligations are settled, after which it will be dissolved. For purposes of tax accounting, the Company had an $0.1 million current tax receivable as of February 28, 2023.

The Company’s Texas Teachers of Tomorrow, LLC common stock was sold during the year ended February 28, 2022. The entity which held this investment, SIA-TT, Inc. will remain in existence for a period of time until all ongoing indemnification obligations are settled, after which it will be dissolved. For purposes of tax accounting, the Company had an $0.1 million current tax receivable as of February 28, 2023.

The Company’s GreyHeller LLC Series A preferred units was sold during the year ended February 28, 2022. The entity which held this investment, SIA-TT, Inc. will remain in existence for a period of time until all ongoing indemnification obligations are settled, after which it will be dissolved. For purposes of tax accounting, the Company had an $0.4 million current tax receivable as of February 28, 2023.

The Company may distribute a portion of its realized net long term capital gains in excess of realized net short term capital losses to its stockholders, but may also decide to retain a portion, or all, of its net capital gains and elect to pay the 21% U.S. federal tax on the net capital gain, potentially in the form of a “deemed distribution” to its stockholders.  Income tax (provision) relating to an election to retain its net capital gains, including in the form of a deemed distribution, is included as a component of income tax (provision) benefit from realized gains on investments, depending on the character of the underlying taxable income (ordinary or capital gains), on the consolidated statements of operations. 

Deferred tax assets and liabilities, and related valuation allowances, as of February 28, 2023 and February 28, 2022, were as follows:

	February 28, 2023			February 28, 2022
Total deferred tax assets	$	2,542,373		$	1,991,241
Total deferred tax liabilities		(3,008,829	)		(1,293,496	)
Valuation allowance on net deferred tax assets		(2,350,116	)		(1,946,761	)
Net deferred tax liability	$	(2,816,572	)	$	(1,249,016	)

As of February 28, 2023, the valuation allowance on deferred tax assets was $2.4 million, which represents the federal and state tax effect of net operating losses and unrealized losses that we do not believe we will realize through future taxable income. Any adjustments to the Company’s valuation allowance will depend on estimates of future taxable income and will be made in the period such determination is made.

Net deferred tax (benefit) expense for the year ended February 28, 2023 includes $1.7 million net change in unrealized appreciation (depreciation) on investments and $(0.2) million net change in total operating expense (benefit), in the consolidated statement of operations, respectively.

Net deferred tax (benefit) expense for the year ended February 28, 2022 includes $(0.7) million net change in unrealized appreciation (depreciation) on investments and $(0.0) million net change in total operating expense, in the consolidated statement of operations, respectively.

Net deferred tax (benefit) expense for the year ended February 28, 2021 includes $0.6 million net change in unrealized appreciation (depreciation) on investments and $0.0 million net change in total operating expense, in the consolidated statement of operations, respectively.

Deferred tax temporary differences may include differences for state taxes and joint venture interests.

Federal and state income tax provisions (benefits) on investments for the year ended February 28, 2023, February 28, 2022 and February 28, 2021 are as follows: 

	February 28, 2023			February 28, 2022			February 28, 2021
Current
Federal	$	(473,475	)	$	2,498,515		$	-
State		(80,273	)		327,021			-
Net current expense		(553,748	)		2,825,536			-
Deferred
Federal		1,467,975			(444,628	)		461,503
State		99,582			(227,737	)		113,798
Net deferred expense		1,567,557			(672,365	)		575,301
Net tax provision	$	1,013,809		$	2,153,171		$	575,301

The Company has remaining federal net operating loss carryforwards of $3.7 million which has an indefinite life. In addition, the Company has state net operating loss carryforwards of $0.1 million, which begin to expire in fiscal year 2028.

Income tax expense was computed by applying the U.S. federal statutory rate of 21% combined with the weighted average state tax rate applicable to each taxable blocker based on the states they operate in.