Taxation

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Taxation

15. Taxation

Repay Holdings Corporation is taxed as a corporation and is subject to paying corporate federal, state and local taxes on the income allocated to it from Hawk Parent, based upon Repay Holding Corporation’s economic interest held in Hawk Parent, as well as any stand-alone income or loss it generates. Hawk Parent is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Hawk Parent is not subject to U.S. federal and certain state and local income taxes. Hawk Parent’s members, including Repay Holdings Corporation, are liable for federal, state and local income taxes based on their allocable share of Hawk Parent’s pass-through taxable income.

The components of loss before income taxes are as follows:

	Year Ended December 31, 2021	Year Ended December 31, 2020	July 11, 2019 to December 31, 2019	January 1, 2019 to July 10, 2019
	(Successor)			(Predecessor)
Domestic	$(87,352,396)	$(129,267,523)	$(51,540,441)	$(23,668,078)
Foreign	624,677	(456,747)	(269,721)	(74,452)
Loss before income tax benefit	$(86,727,719)	$(129,724,270)	$(51,810,162)	$(23,742,530)

The Company recorded a provision for income tax as follows:

	Year Ended December 31, 2021	Year Ended December 31, 2020	July 11, 2019 to December 31, 2019	January 1, 2019 to July 10, 2019
	(Successor)			(Predecessor)
Current expense
Federal	$34,401	$                     —	$                —	$              —
State	2,367	—	—	—
Foreign	—	—	—	—
Total current expense	$36,768	$                    —	$                —	$              —
Deferred expense
Federal	$(18,113,316)	$(10,523,778)	$(4,343,013)	$              —
State	(12,799,753)	(1,708,969)	(575,152)	—
Foreign	185,145	(125,278)	(72,824)	—
Total deferred benefit	(30,727,924)	(12,358,025)	(4,990,989)	—
Income tax benefit	$(30,691,156)	$(12,358,025)	$(4,990,989)	$             —

A reconciliation of the United States statutory income tax rate to the Company’s effective income tax rate is as follows for the years indicated:

	Year Ended December 31, 2021	Year Ended December 31, 2020	July 11, 2019 to December 31, 2019	January 1, 2019 to July 10, 2019
	(Successor)			(Predecessor)
Federal income tax expense	21.0%	21.0%	21.0%	0.0%
State taxes, net of federal benefit	5.2%	1.3%	1.1%	0.0%
Income attributable to noncontrolling interest	(1.4%)	(1.8%)	(6.1%)	0.0%
Excess tax benefit related to share-based compensation	0.6%	0.4%	0.4%	0.0%
Change in fair value of warrant liabilities	0.0%	(11.5%)	(6.2%)	0.0%
State rate change impact on deferred taxes	9.5%	0.0%	0.0%	0.0%
Other, net	0.5%	0.1%	(0.6%)	0.0%
Total deferred benefit	35.4%	9.5%	9.6%	0.0%

The Company’s effective tax rate was 35.4%, 9.5% and 9.6% for the years ended December 31, 2021 and 2020, and the period from July 11, 2019 to December 31, 2019, respectively. The comparison of the Company’s effective tax rate to the U.S. statutory tax rate of 21% was primarily influenced by the fact that the Company is not liable for the income taxes on the portion of Hawk Parent’s earnings that are attributable to noncontrolling interests. Further, the comparison is reflective of the effect of remeasuring net deferred tax assets for state tax rate changes. The results for the Predecessor do not reflect income tax expense because, prior to the closing of the Business Combination, the consolidated Hawk Parent was treated as a partnership for U.S. federal and most applicable state and local income tax purposes and was not subject to corporate tax.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Details of the Company's deferred tax assets and liabilities are as follows:

	December 31, 2021	December 31, 2020
Deferred tax assets
Tax Credits	$1,547,569	$522,081
Section 163(j) Limitation Carryover	26,800	250,095
Acquisition Costs	348,158	352,291
Federal Net Operating Losses	25,283,737	8,834,924
State Net Operating Losses	4,907,835	1,264,059
Foreign Net Operating Losses	16,556	202,517
Other Assets	6,794,593	2,997,426
Partnership basis tax differences	130,440,236	154,253,345
Total deferred tax asset	169,365,484	168,676,738
Valuation allowance	(16,393,745)	(33,339,509)
Total deferred tax asset, net of valuation allowance	152,971,739	135,337,229
Deferred tax liabilities
Other Intangibles - Payix	(7,711,856)	—
Total deferred tax liabilities	(7,711,856)	—
Net deferred tax assets	$145,259,883	$135,337,229

As a result of the equity offering by the Company, BillingTree acquisition, finalization of 2020 income tax returns and Post-Merger Repay Unit exchanges during the year ended December 31, 2021, the Company recognized a reduction of the deferred tax asset (“DTA”) and offsetting deferred tax liability (“DTL”) in the amount of $19.2 million, compared to an increase of $27.5 million as a result of equity offerings by the Company, warrant exercises and Post-Merger Repay unit exchanges during the year ended December 31, 2020, to account for the portion of the Company’s outside basis in the partnership interest that it will not recover through tax deductions, a ceiling rule limitation arising under Internal Revenue Code (the “Code”) sec. 704(c). As the ceiling rule causes taxable income allocations to be in excess of 704(b) book allocations the DTL will unwind, leaving only the DTA, which may only be recovered through the sale of the partnership interest in Hawk Parent. The Company has concluded, based on the weight of all positive and negative evidence, that all of the DTA associated with the ceiling rule limitation is not likely to be realized as of December 31, 2021. As such, a 100% valuation allowance was recognized. 

As of December 31, 2021, the Company had net tax effected federal and state (net of federal benefit) net operating losses (“NOLs”) of $30.2 million, of which approximately $25.8 million have an indefinite life. NOLs of approximately $4.4 million will begin to expire in 2030. As of December 31, 2021, the Company had federal and state tax credit carryforwards of $1.1 million and $0.4 million, respectively, which will begin to expire in 2037 and 2034, respectively. The Company believes as of December 31, 2021, based on the weight of all positive and negative evidence, it is more likely than not that the results of future operations will generate sufficient taxable income to realize the NOLs and tax credits and, as such, no valuation allowance was recorded.

No uncertain tax positions existed as of December 31, 2021.

Tax Receivable Agreement Liability

Pursuant to our election under Section 754 of the Code, we expect to obtain an increase in our share of the tax basis in the net assets of Hawk Parent when Post-Merger Repay Units are redeemed or exchanged for Class A common stock of Repay Holdings Corporation. The Company intends to treat any redemptions and exchanges of Post-Merger Repay Units as direct purchases for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various 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.

On July 11, 2019, the Company entered into a TRA that provides for the payment by the Company of 100% of the amount of any tax benefits realized, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of Hawk Parent resulting from any redemptions or exchanges of Post-Merger Repay Units and from our acquisition of the equity of the selling Hawk Parent members, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the "TRA Payments"). The TRA Payments are not conditioned upon any continued ownership interest in Hawk Parent or Repay. The rights of each party under the TRA other than the Company are assignable. The timing and amount of aggregate payments due under the TRA

may vary based on a number of factors, including the timing and amount of taxable income generated by the Company each year, as well as the tax rate then applicable, among other factors.

As of December 31, 2021, the Company had a liability of $245.8 million related to its projected obligations under the TRA, which is captioned as the tax receivable agreement liability in the Company’s Consolidated Balance Sheets. The increase in the TRA liability for the year ended December 31, 2021, was primarily a result of the change in the Early Termination Rate, as defined in the TRA, selling members of Hawk Parent exchanging 407,584 Post-Merger Repay Units during the year ended December 31, 2021 in accordance with the Exchange Agreement, the finalization of the various components related to the 2020 exchanges of Post-Merger Repay Units, and the impact of the remeasurement of the state tax rate. This resulted in an increase to the Company’s share of the tax basis in the net assets of Hawk Parent.