Vistra Corp

5. INCOME TAXES

Vistra files a U.S. federal income tax return that includes the results of its consolidated subsidiaries. Vistra serves as the corporate parent of the Vistra consolidated group. Pursuant to applicable U.S. Department of the Treasury regulations and published guidance of the IRS, corporations that are members of a consolidated group have joint and several liability for the taxes of such group.

Income Tax (Expense) Benefit

The components of our income tax (expense) benefit are as follows:

We evaluate and update our annual effective income tax rate on an interim basis based on current and forecasted earnings and tax laws.

For the three months ended September 30, 2024, the effective tax rate of 23.2% was higher than the U.S. federal statutory rate of 21% due primarily to state income taxes. For the nine months ended September 30, 2024, the effective tax rate of 23.0% was higher than the U.S. federal statutory rate of 21% due primarily to the impact of state income taxes offset by discrete tax benefits related to stock-based compensation.

For the three months ended September 30, 2023, the effective tax rate of 25.2% was higher than the U.S. federal statutory rate of 21% due primarily to state income taxes. For the nine months ended September 30, 2023, the effective tax rate of 21.9% was higher than the U.S. federal statutory rate of 21% due primarily to state income taxes, partially offset by the release of uncertain tax positions related to the 2018 and 2019 IRS audit closed in the second quarter of 2023.

Inflation Reduction Act of 2022 (IRA)

In August 2022, the U.S. enacted the IRA, which, among other things, implements substantial new and modified energy tax credits, a 15% corporate alternative minimum tax (CAMT) on book income of certain large corporations, and a 1% excise tax on net stock repurchases. We do not expect Vistra to be subject to the CAMT in the 2024 tax year as it applies only to corporations with a three-year average annual adjusted financial statement income in excess of $1 billion. We have taken the CAMT and relevant extensions or expansions of existing tax credits applicable to projects in our immediate development pipeline into account when forecasting cash taxes. See Note 1 for discussion of the nuclear PTC introduced by the IRA.

Transferable ITCs

In June 2023, our 350 MW battery ESS at our Moss Landing Power Plant site (Moss Landing Phase III) commenced commercial operations. As a result of Moss Landing Phase III reaching commercial operations, in June 2023 we recognized $154 million of transferable ITCs associated with the project in other noncurrent assets in the condensed consolidated balance sheet. In September 2024, we recognized an additional $2 million of transferable ITCs associated with the project and reclassified the $156 million of credits to other current assets. In October 2024, these credits were sold for cash consideration (see Note 1).

Final Section 163(j) Regulations

The final Section 163(j) regulations, which limits qualified deductions for business interest expense, were issued in July 2020 and provided a critical correction to the proposed regulations regarding the computation of adjusted taxable income. As of January 1, 2022, certain provisions in the final Section 163(j) regulations have sunset, including the add-back of depreciation and amortization to adjusted taxable income. As a result, under the law as currently enacted, Vistra's deductible business interest expense was significantly limited for the 2023 tax year and will continue to be so limited under current law going forward. Vistra remains active in legislative monitoring and advocacy efforts to support a legislative solution to reinstate and make permanent the add-back of depreciation and amortization to adjusted taxable income.