Great Elm Capital Corp. Income Taxes Disclosure
9. TAX INFORMATION
The tax character of distributions were as follows:
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For the year ended December 31, |
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(in thousands) |
|
2024 |
|
|
2023 |
|
|
2022 |
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|||
Distributions paid from: |
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|
|
|
|
|
|
|
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|||
Ordinary income |
|
$ |
14,892 |
|
|
$ |
11,403 |
|
|
$ |
13,023 |
|
Net long term capital gains |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Return of capital |
|
|
- |
|
|
|
|
|
|
|
||
|
|
|
- |
|
|
|
|
|
|
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||
Total taxable distributions |
|
$ |
14,892 |
|
|
$ |
11,403 |
|
|
$ |
13,023 |
|
The components of distributable earnings (losses) on a tax basis were as follows:
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|
As of December 31, |
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(in thousands) |
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||
Undistributed ordinary income, net |
|
$ |
7,017 |
|
|
$ |
5,928 |
|
|
$ |
3,534 |
|
Capital loss carryforwards |
|
|
(181,545 |
) |
|
|
(193,501 |
) |
|
|
(185,737 |
) |
Total undistributed earnings |
|
|
(174,528 |
) |
|
|
(187,573 |
) |
|
|
(182,203 |
) |
Unrealized earnings (losses), net |
|
|
(21,585 |
) |
|
|
2,441 |
|
|
|
(17,171 |
) |
Total accumulated earnings (losses), net(1) |
|
$ |
(196,113 |
) |
|
$ |
(185,132 |
) |
|
$ |
(199,374 |
) |
The Company’s aggregate unrealized appreciation and depreciation on investments based on cost for U.S. federal income tax purposes were as follows:
|
|
As of December 31, |
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|||||
(in thousands) |
|
2024 |
|
|
2023 |
|
||
Tax cost |
|
$ |
354,295 |
|
|
$ |
238,978 |
|
Gross unrealized appreciation |
|
|
16,176 |
|
|
|
13,715 |
|
Gross unrealized depreciation |
|
|
(37,761 |
) |
|
|
(11,273 |
) |
Net unrealized appreciation (depreciation) on investments |
|
$ |
(21,585 |
) |
|
$ |
2,441 |
|
The difference between GAAP-basis and tax basis unrealized gains (losses) is attributable primarily to differences in the tax treatment of underlying fund investments.
In order to present certain components of the Company’s capital accounts on a tax-basis, certain reclassifications have been recorded to the Company’s accounts. These reclassifications have no impact on the NAV of the Company's and result primarily from dividend redesignations, certain non-deductible expenses, and differences in the tax treatment of partnership income and defaulted bonds.
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As of December 31, |
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|||||
(in thousands) |
|
2024 |
|
|
2023 |
|
||
Paid-in capital in excess of par |
|
$ |
(359 |
) |
|
$ |
(312 |
) |
Accumulated undistributed net investment income |
|
|
3,530 |
|
|
|
1,254 |
|
Accumulated net realized gain (loss) |
|
|
(3,170 |
) |
|
|
(942 |
) |
At December 31, 2024, the Company, for federal income tax purposes, had capital loss carryforwards of $181,545 which will reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Code, and thus will reduce the amount of distributions to stockholders, which would otherwise be necessary to relieve the Company of any liability for federal income tax. On December 22, 2010, the Modernization Act was signed by the President. The Modernization Act changed the capital loss carryforward rules as they relate to regulated investment companies. Capital losses generated in tax years beginning after the date of enactment may now be carried forward indefinitely and retain the character of the original loss. Of the capital loss carryforwards at December 31, 2024, $39,740 are limited losses and available for use subject to annual limitation under Section 382. Of the capital losses at December 31, 2024, $16,815 are short-term and $164,730 are long term.
ASC 740 provides guidance on the accounting for and disclosure of uncertainty in tax position. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Based on its analysis of its tax position for all open tax years (fiscal years through 2024), the Company has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. Such open tax years remain subject to examination and adjustment by tax authorities.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.