MSC Income Fund Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

12 Months Ended

Dec. 31, 2023

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 $56.1 million, or $0.700 per share, during the year ended December 31, 2023, compared to $51.6 million, or $0.645 per share, during the year ended December 31, 2022. For tax purposes, the 2023 dividends, which included the effects of dividends on an accrual basis, totaled $56.1 million, or $0.700 per share, and were comprised of (i) ordinary income totaling $0.596 per share and (ii) qualified dividend income totaling $0.104 per share. As of December 31, 2023, MSC Income Fund estimates that it has generated undistributed taxable income of $14.7 million, or $0.18 per share, that will be carried forward toward distributions to be paid in 2024.

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.

The tax character of distributions paid for the years ended December 31, 2023, 2022 and 2021 was as follows:


	Year Ended December 31,
	2023		2022		2021
	(dollars in thousands)
Ordinary income (1)	$	47,756	$	61,854	$	29,797
Qualified dividends	8,301		1,727		92

Distributions on tax basis	$	56,057	$	63,581	$	29,889

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 years ended December 31, 2023, 2022 and 2021.


	Year Ended December 31,
	2023		2022		2021
	(estimated, dollars in thousands)
Net increase in net assets resulting from operations	$	66,209	$	45,588	$	73,636
Net unrealized (appreciation) depreciation	(46,319)		1,702		(25,095)
Income tax provision	3,769		1,643		1,890
Pre-tax book (income) loss not consolidated for tax purposes	4,241		(9,748)		(17,640)
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates	22,228		9,820		3,171
Estimated taxable income (1)	50,128		49,005		35,962
Taxable income earned in prior year and carried forward for distribution in current year	20,674		23,276		29,173
Taxable income earned prior to period end and carried forward for distribution next period	(28,764)		(33,491)		(35,250)
Dividend accrued as of period end and paid in the following period	14,019		12,817		11,974
Taxable income earned to be carried forward	(14,745)		(20,674)		(23,276)
Total distributions accrued or paid to common stockholders	$	56,057	$	51,607	$	41,859

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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 provision 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 years ended December 31, 2023, 2022 and 2021:


	Year Ended December 31,
		2023		2022		2021
		(dollars in thousands)
Current tax expense:
Federal		$	13	$	33	$	—
State		340		495		495
Excise		519		753		1,395
Total current tax expense		872		1,281		1,890
Deferred tax expense (benefit):
Federal		3,450		351		—
State		(553)		11		—
Total deferred tax expense		2,897		362		—

Total income tax provision		$	3,769	$	1,643	$	1,890

MSIF operates in a manner to maintain its RIC status and to eliminate corporate-level U.S. federal income tax (other than the 4% excise tax) by distributing sufficient investment company taxable income and long-term capital gains. As a result, MSIF will have an effective tax rate equal to 0% before the excise tax and income taxes incurred by the Taxable Subsidiaries. As such, a reconciliation of the differences between MSC Income Fund’s reported income tax expense and its tax expense at the federal statutory rate of 21% is not meaningful.

As of December 31, 2023, the cost of investments for U.S. federal income tax purposes was $1,035.0 million, with such investments having an estimated net unrealized appreciation of $57.9 million, composed of gross unrealized appreciation of $154.3 million and gross unrealized depreciation of $96.4 million. As of December 31, 2022, the cost basis of investments for tax purposes was $1,059.9 million, with such investments having an estimated net unrealized appreciation of $8.3 million, composed of gross unrealized appreciation of $122.6 million and gross unrealized depreciation of $114.3 million.

The following table sets forth the significant components of net deferred tax assets and liabilities as of December 31, 2023 and 2022:


	Year Ended December 31,
	2023		2022
	(dollars in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	671	$	398
Interest expense carryforwards	3,258		1,426
General business and foreign tax credit carryforwards	329		156
Capital loss carryforwards	6,041		10,013


Total deferred tax assets	10,299		11,993
Deferred tax liabilities:
Net basis differences in portfolio investments	(1,484)		(3,777)
Net unrealized appreciation of portfolio investments	(12,074)		(8,578)
Total deferred tax liabilities	(13,558)		(12,355)

Total deferred tax liabilities, net	$	(3,259)	$	(362)

The net deferred tax liability at December 31, 2023 was $3.3 million. The net deferred tax liability at December 31, 2022 was $0.4 million. Management believes that the realization of the deferred tax assets is more likely than not based on expectations as to future taxable income and scheduled reversals of temporary differences. Accordingly, MSC Income Fund did not record a valuation allowance related to its deferred tax assets as of December 31, 2023 and 2022.

At December 31, 2023, for U.S. federal income tax purposes, the Taxable Subsidiaries had net operating loss carryforwards from prior years which, if unused, will expire in 2037. Any net operating losses generated in 2018 and future periods are not subject to expiration and will carry forward indefinitely until utilized. The net capital loss carryforwards of the Taxable Subsidiaries will expire in various taxable years 2025 through 2027. Additionally, the Taxable Subsidiaries have interest expense limitation carryforwards, which have an indefinite carryforward period. In addition, as of December 31, 2023, for U.S. federal income tax purposes at the RIC level, MSIF did not have capital loss carryforwards available to offset future capital gains, to the extent available and permitted by U.S. federal income tax law.