Payable Pursuant to the Tax Receivable Agreement

12 Months Ended

Dec. 31, 2021

Payable Pursuant to the Tax Receivable Agreement

Payable Pursuant to the Tax Receivable AgreementThe Company has a TRA with the TRA Owners that provides for the payment by the Company to the TRA Owners (or their permitted assignees) of 85% of the amount of the benefits, if any, that the Company actually realizes or is deemed to realize as a result of (i) the Company’s allocable share of existing tax basis acquired in connection with the Organizational Transactions (including Blocker’s share of existing tax basis) and increases to such allocable share of existing tax basis, (ii) certain increases in the tax basis of assets of Shoals Parent and its subsidiaries resulting from purchases or exchanges of LLC Interests, and (iii) certain other tax benefits related to the Company entering into the TRA, including those attributable to payments made under the TRA. These contractual payment obligations are obligations of the Company and not of Shoals Parent. The Company's payable pursuant to the TRA was determined on an undiscounted basis in accordance with ASC 450, Contingencies, since the contractual payment obligations were deemed to be probable and reasonably estimable.

For purposes of the TRA, the benefit deemed realized by the Company is computed by comparing the actual income tax liability of the Company (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase to the tax basis of the assets of Shoals Parent as a result of the purchases or exchanges, and had the Company not entered into the TRA.

The following table reflects the changes to the Company's payable pursuant to the tax receivable agreement (in thousands):


	Year Ended December 31, 2021
Beginning balance	$	—
Additions to TRA:
IPO exchange of LLC Interests for Class A Common Stock from founder	27,759
Merger of Shoals investment CTB	14,418
Follow-on offering exchange of LLC Interests for Class A common stock	62,025
December exchange of LLC Interest for Class A common stock	50,509
Adjustment for change in estimated tax rate	1,663
Payments under TRA	—
	156,374
Less current portion under TRA	—
Ending balance	$	156,374

The TRA further provides that, upon certain mergers, asset sales or other forms of business combinations or other changes of control, or if the Company materially breaches any of its material obligations under the TRA, the Company (or its successor) would owe to the TRA Owners a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the TRA that would be based on certain assumptions, including a deemed exchange of LLC Interests and that the Company would have sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other tax benefits related to entering into the TRA. The Company also is entitled to terminate the TRA, which, if terminated, would obligate the Company to make early termination payments to the TRA Owners.

When estimating the expected tax rate to use in order to determine the tax benefit expected to be recognized from the Company’s increased tax basis as a result of exchanges of LLC Interests by the TRA Owners, the Company continuously monitors changes in its overall tax posture, including changes resulting from new legislation and changes as a result of new jurisdictions in which the Company is subject to tax.

As of December 31, 2021, the Company recorded deferred tax assets of $184.0 million associated with basis differences in assets upon acquiring an interest in Shoals Parent and pursuant to making an election under Section 754 of the Internal Revenue Code of 1986 (the "Internal Revenue Code"), as amended. These basis differences are included in the overall partnership basis differences disclosed in Note 14. The aggregate payable pursuant to the tax receivable agreement represents 85% of the tax benefits that the Company expects to receive in connection with the Section 754 election. In accordance with the TRA, the next annual payment is anticipated on February 20, 2023, approximately 125 days after filing the federal tax return.