Quarterly report pursuant to Section 13 or 15(d)

DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

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DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
 9 Months Ended
Sep. 30, 2023
Income Tax Disclosure [Abstract]  
DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
MSC Income Fund currently pays quarterly dividends to its stockholders. Future quarterly dividends, if any, will be determined by its Board of Directors on a quarterly basis. MSC Income Fund paid or accrued dividends to its common stockholders of $14.0 million, or $0.175 per share, during the three months ended September 30, 2023, and $42.0 million, or $0.525 per share, during the nine months ended September 30, 2023, compared to $12.8 million, or $0.16 per share, during the three months ended September 30, 2022, and $38.8 million, or $0.485 per share, during the nine months ended September 30, 2022.
MSIF has elected to be treated for U.S. federal income tax purposes as a RIC. MSIF’s taxable income includes the taxable income generated by MSIF and certain of its subsidiaries, including the Structured Subsidiaries, which are treated as disregarded entities for tax purposes. As a RIC, MSIF generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that MSIF distributes to its stockholders. MSIF must generally distribute at least 90% of its “investment company taxable income” (which is generally its net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status (pass-through tax treatment for amounts distributed). As part of maintaining RIC status, undistributed taxable income (subject to a 4% non-deductible U.S. federal excise tax) pertaining to a given fiscal year may be distributed up to twelve months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (i) filing of the U.S. federal income tax return for the applicable fiscal year or (ii) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
The determination of the tax attributes for MSC Income Fund’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate (plus a 3.8% Medicare surtax, if applicable) on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income and qualified dividends, but may also include either one or both of capital gains and return of capital.
Listed below is a reconciliation of “Net increase in net assets resulting from operations” to taxable income and to total distributions declared to common stockholders for the nine months ended September 30, 2023 and 2022.
Nine Months Ended September 30,
2023 2022
(estimated, dollars in thousands)
Net increase in net assets resulting from operations $ 44,869  $ 33,303 
Net unrealized (appreciation) depreciation (30,415) 11,452 
Income tax provision 3,189  1,880 
Pre-tax book income not consolidated for tax purposes (676) (11,403)
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates 20,099  893 
Estimated taxable income (1) 37,066  36,125 
Taxable income earned in prior year and carried forward for distribution in current year 20,674  23,276 
Taxable income earned prior to period end and carried forward for distribution next period (29,705) (33,421)
Dividend accrued as of period end and paid in the following period 14,002  12,809 
Taxable income earned to be carried forward (15,703) (20,612)
Total distributions accrued or paid to common stockholders $ 42,037  $ 38,789 
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(1)MSIF’s taxable income for each period is an estimate and will not be finally determined until MSIF files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate.
The Taxable Subsidiaries primarily hold certain equity investments for MSC Income Fund. The Taxable Subsidiaries permit MSC Income Fund to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes and to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with MSIF for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in MSC Income Fund’s consolidated financial statements as portfolio investments and recorded at fair value. The Taxable Subsidiaries are not consolidated with MSIF for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities, as a result of their ownership of certain portfolio investments. The taxable income, or loss, of the Taxable Subsidiaries may differ from their book income, or loss, due to temporary book and tax timing differences and permanent differences. The Taxable Subsidiaries are each taxed at corporate income tax rates based on their taxable income. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the Taxable Subsidiaries are reflected in MSC Income Fund’s consolidated financial statements.
The income tax expense (benefit) for MSC Income Fund is generally composed of (i) deferred tax expense (benefit), which is primarily the result of the net activity relating to the portfolio investments held in the Taxable Subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation or depreciation, changes in valuation allowance and other temporary book tax differences, and (ii) current tax expense, which is primarily the result of current U.S. federal income and state taxes and excise taxes on MSC Income Fund’s estimated undistributed taxable income. The income tax expense, or benefit, and the related tax assets and liabilities generated by the Taxable Subsidiaries, if any, are reflected in MSC Income Fund’s Consolidated Statements of Operations. MSC Income Fund’s provision for income taxes was comprised of the following for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(dollars in thousands)
Current tax expense (benefit):
Federal $ (39) $ 190  $ 15  $ 194 
State 337  169  565  484 
Excise 133  219  374  881 
Total current tax expense 431  578  954  1,559 
Deferred tax expense (benefit):
Federal 292  131  2,533  298 
State (750) 13  (298) 23 
Total deferred tax expense (benefit) (458) 144  2,235  321 
Total income tax provision (benefit) $ (27) $ 722  $ 3,189  $ 1,880 
The net deferred tax liability at September 30, 2023 and December 31, 2022 was $2.6 million and $0.4 million, respectively, with the change primarily related to changes in net unrealized appreciation or depreciation, changes in loss carryforwards and other temporary book-tax differences relating to portfolio investments held by the Taxable Subsidiaries.
At September 30, 2023, for U.S. federal income tax purposes, the Taxable Subsidiaries had net operating loss carryforwards generated in 2020 and future periods that are not subject to expiration. The net operating losses will carryforward indefinitely until utilized. The net capital loss carryforwards of MSC Income Fund, if not utilized, will expire in various taxable years 2023 through 2027. Additionally, the Taxable Subsidiaries have interest expense limitation carryforwards which have an indefinite carryforward period.