Income Taxes

Terra BDC elected to be taxed as a REIT under the Code commencing with its short taxable year beginning October 1, 2018 through the Merger on October 1, 2022. In order to qualify as a REIT, Terra BDC was required, among other things, to distribute dividends equal to at least 90% of its REIT net taxable income to the stockholders annually and meet certain tests regarding the nature of its income and assets. Because federal income tax regulations differ from U.S. GAAP, distributions in accordance with tax regulations may differ from net investment for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Taxable income generally differs from net increase in net assets resulting from operations for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses and generally excludes unrealized appreciation (depreciation) on investments as investment gains and losses are not included in taxable income until they are realized.

The following table reconciles net increase in net assets resulting from operations to taxable income:


	Nine Months Ended September 30, 2022
	(Predecessor Basis)
Net decrease in net assets resulting from operations	$	(1,714,212)
Net change in unrealized depreciation on investments	3,444,211
Net change in unrealized depreciation on obligations under participation agreements	(42,128)
Income tax expense	605,787
Reversal of incentive fees on capital gains	(102,160)
Other temporary differences (1)	(475,851)
Total taxable income	$	1,715,647

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(1)Other temporary differences primarily related to capitalization and amortization of transaction-related fees.

Taxable REIT Subsidiary

Terra BDC held certain portfolio company investments through consolidated taxable REIT subsidiaries, of which it was the parent. Such subsidiaries may be subject to U.S. federal and state corporate-level income taxes. These consolidated subsidiaries recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated statements of assets and liabilities using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse. Terra BDC had one TRS prior to the Merger. In connection with the Merger on October 1, 2022, the TRS became a qualified REIT subsidiary of Terra REIT.

Income Tax Provision

The components of the Company's provision for income taxes were as follows:


	Nine Months Ended September 30, 2022
	(Predecessor Basis)
Federal
Current	$	423,989
Deferred	(16,057)
	407,932
State and Local
Current	204,851
Deferred	(6,996)
	197,855
Total Provision for income taxes	$	605,787

A reconciliation of effective income tax for the period presented is as follows:


	Nine Months Ended September 30, 2022
	(Predecessor Basis)
Pre-tax income attributable to taxable subsidiaries	$	2,147,385

Federal provision at statutory tax rate (21%)	$	407,932
State and local taxes, net of deferred benefit	197,855
Total provision for income taxes	$	605,787
Effective income tax rate	28.2		%

Income Taxes Paid

For the nine months ended September 30, 2022, the Company paid $0.6 million of income taxes. There were no income taxes payable as of December 31, 2023.

Source of Distribution

The following table reflects, for tax purposes, the estimated sources of the cash distributions that Terra BDC has paid on Terra BDC Common Stock:


	Nine Months Ended September 30, 2022
	(Predecessor Basis)
Source of Distribution	Distribution Amount (1)		%
Return of capital	$	789,506	28.6	%
Net investment income (2)	1,970,476		71.4	%
Distributions on a tax basis:	$	2,759,982	100.0	%

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(1)The Distribution Amount and Percentage reflected are estimated figures. The actual source of distributions was calculated in connection with the filing of Terra BDC’s tax return.

(2)The TRS’s taxable income was not available for distribution to Terra BDC’s stockholders until the income was distributed to the parent company. For the nine months ended September 30, 2022, all of the TRS’s taxable income was distributed to the parent company.

As of September 30, 2022, Terra BDC did not have differences between amortized cost basis and tax basis of investments.

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.

Terra Income Fund 6, LLC Income Taxes Disclosure

About Income Taxes Disclosures

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