PROVISIONS FOR INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

PROVISIONS FOR INCOME TAXES

PROVISIONS FOR INCOME TAXES

Subsequent to the Company’s incorporation, the Company and its indirectly owned corporate subsidiaries, Clearfield and Leechburg, provide for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities—specifically for the Company, its investment in Stronghold LLC—using enacted tax rates expected to be in effect during the year in which the basis differences reverse. Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

Prior to the Reorganization, Scrubgrass and Stronghold Power were structured as a limited partnership and limited liability company, respectively; therefore any taxable income or loss was included in the income tax returns of the individual owners. Accordingly, no recognition has been given to federal or state income taxes in the Company’s financial statements for the periods prior to the Reorganization.

For the year ended December 31, 2021, the Company’s total income tax benefit of $0 differed from amounts computed by applying the United States federal statutory rate to pre-tax loss for the period primarily due to net loss attributable to the noncontrolling interest and to the period prior to the Reorganization (i.e., prior to the incorporation of Stronghold Inc.), and due to maintaining a valuation allowance on the Company’s deferred tax assets.

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

	Year ended December 31,
	2021		2020
Current income tax provision (benefit):
Federal	$	—	$	—
State	—		—
Total current income tax provision	$	—	$	—
Deferred income tax provision (benefit):
Federal	$	—	$	—
State	—		—
Total deferred income tax provision (benefit)	$	—	$	—
Total provision for (benefit from) income taxes	$	—	$	—

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before the provision for income taxes. A reconciliation of the statutory federal income tax amount to the recorded expense is as follows:

	Year ended December 31,
	2021		2020
Income tax expense (benefit) at 21% federal statutory rate	$	(5,723,619)	$	—
Income attributable to the pre-incorporation period	50,179		—
Income attributable to nontaxable noncontrolling interest	3,318,679		—
State income tax expense (benefit), net of federal tax effect	(752,955)		—
Change in valuation allowance	2,756,486		—
Other, net	351,230		—
Total provision for (benefit from) income taxes	$	—	$	—

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020 are as follows:

	Year ended December 31,
	2021		2020
Deferred tax assets:
Net operating loss and other carryforwards	$	6,243,820	$	—
Investment in Stronghold LLC	3,999,780		—
Other	—		—
Total deferred tax assets	$	10,243,600	$	—
Valuation allowance	$	(10,243,600)	$	—
Net deferred tax assets	$	—	$	—
Net deferred tax assets (liabilities)	$	—	$	—

=

As of December 31, 2021 and 2020, the Company had no net deferred tax assets or deferred tax liabilities. Subsequent to the Company’s Reorganization as discussed further in Note 2 — Nature of Operations and Significant Accounting Policies, deferred taxes are provided on the difference between the Company’s basis for financial reporting purposes and basis for federal income tax purposes in its investment in Stronghold LLC. Prior to the Reorganization, Scrubgrass and Stronghold Power were structured as a limited partnership and limited liability company, respectively; therefore, the taxable income or loss of the Company was included in the income tax returns of the individual owners. Accordingly, no recognition has been given to deferred tax assets or liabilities in the Company’s financial statements for the periods prior to the Reorganization. Clearfield and Leechburg have not recorded any temporary differences resulting in either a deferred tax asset or liability as of December 31, 2021 and 2020.

As of December 31, 2021 no deferred tax asset or liability has been recorded with respect to the Company’s TRA with Q Power because an exchange that triggers amounts owed by the Company under the TRA (i.e., the redemption of Stronghold LLC Units for shares of Class A common stock or cash) has not occurred.

As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $27.7 million which may be carried forward indefinitely to offset future taxable income, and state net operating loss carryforwards of approximately $5.7 million expiring in 2041 if not used. The Company incurred a tax net operating loss in 2021 due principally to Stronghold LLC’s tax deductions for accelerated depreciation, in addition to pre-tax loss. As of December 31, 2021, the Company did not have any uncertain tax positions requiring recognition in the financial statements. The Company’s 2021 tax year and Clearfield’s and Leechburg’s 2018 through 2021 tax years remain open to potential examination by tax authorities.

As of December 31, 2021, the Company had a valuation allowance of approximately $10.2 million related to deferred tax assets the Company does not believe are more likely than not to be realized. The determination to record a valuation allowance was based on management’s assessment of all available evidence, both positive and negative, supporting realizability of the Company’s net operating losses and other deferred tax assets, as required by applicable accounting standards (ASC Topic 740, Income Taxes (“ASC 740”)). Factors contributing to this assessment included the Company’s cumulative and current losses, as well as the evaluation of other sources of income as outlined in ASC 740. The Company continues to evaluate the likelihood of the utilization of its deferred tax assets, and while the valuation allowance remains in place, expects to record no deferred income tax expense or benefit. In light of the criteria under ASC 740 for recognizing the tax benefit of deferred tax assets, the Company maintained a valuation allowance against its federal and state deferred tax assets as of December 31, 2021.