Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 7. Income Taxes

Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 and ending December 31, 2018. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment for financial reporting purposes. Differences 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 tax purposes.

Taxable income generally differs from net increase in net assets resulting from operations for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses and generally excludes unrealized appreciation (depreciation) on investments as investment gains and losses are not included in taxable income until they are realized.

The following table reconciles net increase in net assets resulting from operations to taxable income:

	Nine Months Ended September 30,
	2022		2021
Net (decrease) increase in net assets resulting from operations	$	(1,714,212)	$	2,252,681
Net change in unrealized depreciation (appreciation) on investments	3,444,211		(390,245)
Net change in unrealized depreciation on obligations under participation    agreements	(42,128)		(8,408)
(Reversal of incentive fees) incentive fees on capital gains	(102,160)		167,393
Income tax expense	605,787		—
Other temporary differences (1)	(475,851)		268,279
Total taxable income	$	1,715,647	$	2,289,700

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(1)Other temporary differences primarily related to capitalization and amortization of transaction-related fees.

Taxable REIT Subsidiary

Terra BDC held certain portfolio company investments through consolidated taxable REIT subsidiaries, of which it is the parent. Such subsidiaries may be subject to U.S. federal and state corporate-level income taxes. These consolidated subsidiaries recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated statements of assets and liabilities using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse. As of September 30, 2022 and December 31, 2021, Terra BDC had one TRS which Terra BDC formed to hold secured and unsecured credit facilities.

For the three and nine months ended September 30, 2022, pre-tax income attributable to the TRS was $0.5 million and $2.1 million, respectively. Based on the effective income tax rate of 21.4% and 28.2%, the provision for income tax for the TRS was $0.1 million and $0.6 million, respectively. Additionally, for the three and nine months ended September 30, 2022, Terra BDC had temporary differences between the tax basis and book basis of certain assets and liabilities totaling $4.5 thousand and $0.1 million, resulting in a deferred tax asset, net of a deferred tax liability, and corresponding deferred income tax benefit of $3.0 thousand and $21.6 thousand, respectively. For the three and nine months ended September 30, 2021, pre-tax income attributable to the TRS was $0.5 million. Based on the statutory income tax rate of 21%, provision for income tax for the TRS was $0.1 million. Additionally, for the three and nine months ended September 30, 2021, Terra BDC had temporary differences between the tax basis and book basis of certain assets and liabilities totaling $64.4 thousand, resulting in a deferred tax liability, net of a deferred tax asset, and corresponding provision for deferred income tax of $13.5 thousand. Terra LLC has not provided a valuation allowance for the deferred tax asset because Terra LLC expects the deferred tax asset to be realized in future periods.

Source of Distribution

The following table reflects, for tax purposes, the estimated sources of the cash distributions that Terra BDC has paid on its common stock:

	Nine Months Ended September 30,
	2022				2021
Source of Distribution	Distribution Amount (1)(2)		%		Distribution Amount (1)		%
Return of capital	$	789,506	28.6	%	$	577,226	20.1	%
Net investment income	1,970,476		71.4	%	2,289,700		79.9	%
Distributions on a tax basis:	$	2,759,982	100.0	%	$	2,866,926	100.0	%

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(1)The Distribution Amount and Percentage reflected are estimated figures. The actual source of distributions is calculated in connection with the filing of Terra BDC’s tax return.

(2)The TRS’s taxable income is not available for distribution to Terra BDC’s stockholders until the income is distributed up to the parent company. For the nine months ended September 30, 2022, all of the TRS’s taxable income were distributed to the parent company.

As of September 30, 2022 and 2021, Terra BDC did not have differences between amortized cost basis and tax basis cost of investments.