Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of loss before taxes for the years ended December 31, 2021 and 2020 are as follows:

	2021		2020
United States	$	(63,143,175)	$	(29,879,368)
International	(11,966,772)		(2,482,408)
Total	$	(75,109,947)	$	(32,361,776)

The income tax expense components for the years ended December 31, 2021 and 2020 are as follows:

	2021		2020
Current tax expense
Federal	$	—	$	—
Foreign	—		—
State	58,416		30,964
Deferred tax expense
Federal	—		—
Foreign	—		—
State	—		—
Income tax expense	$	58,416	$	30,964

The components of the net deferred tax assets and liabilities as of December 31, 2021 and December 31, 2020 are as follows:

	2021		2020
Deferred tax assets:
Net operating loss carryforwards	$	17,865,584	$	5,849,989
Allowance for uncollectible accounts	6,171,512		2,822,803
Equity based compensation	3,273,873		773,546
Lease liability	50,408		31,855
Startup costs	10,517		10,857
Accruals	328,154		1,722,143
Nondeductible interest	945,153		—
Other	290,029		144,194
Total net deferred tax assets	28,935,230		11,355,387
Valuation allowance	(28,842,025)		(11,227,262)
Deferred tax liabilities:
Depreciation and amortization	(36,457)		(93,439)
Equity based compensation	(356)		(1,664)
Right-of-use asset	(56,392)		(33,022)
Total net deferred tax liabilities	(93,205)		(128,125)
Net deferred tax asset (liability)	$	—	$	—

A reconciliation of the Company’s provision for income taxes at the federal statutory rate to the reported income tax provision for the years ended December 31, 2021 and 2020 are as follows:

	2021		2020
Computed "expected" tax benefit	(21.0)	%	(21.0)	%
State income tax benefit, net of federal tax effect	(2.6)		(1.7)
Nondeductible equity based compensation	1.2		0.1
Other permanent differences	0.3		—
Change in valuation allowance	23.5		23.4
Foreign rate differentials and other	(1.3)		(0.7)
Income tax expense	0.1	%	0.1	%

As of December 31, 2021, the Company had federal, state, and foreign net operating loss carryforwards of approximately $60,228,000, $28,834,000, and $13,589,000, respectively. The federal net operating loss carryforwards that originated after 2017 have an indefinite life and may be used to offset 80% of a future year’s taxable income. The federal net operating loss carryforwards that originated prior to 2018 have expiration dates between 2036 and 2037. The state net operating losses will carryforward for between 15 years and indefinitely and begin to expire in 2031.

The Company’s ability to utilize a portion of its net operating loss carryforwards to offset future taxable income is subject to certain limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company. An ownership change under Section 382 has not been determined at this time.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future growth.

On the basis of this evaluation, as of December 31, 2021, a valuation allowance of $28,842,025 has been recorded since the deferred tax asset is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. The change in valuation allowance was approximately $17,615,000 and $7,567,000 for the years ended December 31, 2021 and 2020, respectively.

The Company files income tax returns in the U.S. federal jurisdiction, Brazil, Canada, Germany, India, Lithuania, the Netherlands and various U.S. states. The Company does not believe an uncertain tax position exists as of December 31, 2021. Based on the Company’s assessment of many factors, including past experience and complex judgements about future events, the Company does not currently anticipate significant changes in its uncertain tax positions over the next 12 months. In connection with the adoption of the referenced provisions, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of December 31, 2021, the Company had no accrued interest and penalties.

The Company’s federal and state tax returns are open for review going back to the 2018 tax year.

The Tax Cuts and Jobs Act, signed into U.S. legislation on December 22, 2017, introduced a new Global Intangible Low-Taxed Income (“GILTI”) provision. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either 1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period cost when incurred, or 2) factoring such amounts into the Company’s measurement of its deferred taxes. GILTI depends not only on the Company's current structure and estimated future income, but also on intent and ability to modify the structure or business. The Company has chosen to treat GILTI as a current-period cost when incurred.

In November 2018, the U.S. Treasury issued proposed regulations for the new section 163(j), which generally limits business interest deductions to 30% of adjusted taxable income (“ATI”). Any disallowed business interest can be carried forward on an indefinite basis. For the year ended December 31, 2021, the Company has disallowed business interest carryforwards of $3,874,493.

Management’s intention is to reinvest foreign earnings into the Company’s foreign operations. To date, Sezzle’s various foreign subsidiaries do not have any earnings.