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, 2024
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 $14.5 million, or $0.18 per share, during the three months ended September 30, 2024, and $43.7 million, or $0.545 per share, during the nine months ended September 30, 2024, compared to $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.
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, 2024 and 2023.
Nine Months Ended September 30,
2024 2023
(estimated, dollars in thousands)
Net increase in net assets resulting from operations $ 36,089  $ 44,869 
Net unrealized (appreciation) depreciation 24,656  (30,415)
Income tax provision 6,150  3,189 
Pre-tax book income not consolidated for tax purposes (9,867) (676)
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates (9,989) 20,099 
Estimated taxable income (1) 47,039  37,066 
Taxable income earned in prior year and carried forward for distribution in current year 14,745  20,674 
Taxable income earned prior to period end and carried forward for distribution next period (32,538) (29,705)
Dividend accrued as of period end and paid in the following period 14,478  14,002 
Total distributions accrued or paid to common stockholders $ 43,724  $ 42,037 
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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, 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 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, 2024 and 2023:
Three Months Ended September 30, Nine Months Ended September 30,
2024 2023 2024 2023
(dollars in thousands)
Current tax expense (benefit):
Federal $ 761  $ (39) $ 1,145  $ 15 
State 397  337  810  565 
Excise 491  133  570  374 
Total current tax expense 1,649  431  2,525  954 
Deferred tax expense (benefit):
Federal 652  292  3,395  2,533 
State 133  (750) 230  (298)
Total deferred tax expense (benefit) 785  (458) 3,625  2,235 
Total income tax provision (benefit) $ 2,434  $ (27) $ 6,150  $ 3,189 
The net deferred tax liability as of September 30, 2024 and December 31, 2023 was $6.9 million and $3.3 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.
As of September 30, 2024, for U.S. federal income tax purposes, the Taxable Subsidiaries did not have any net operating loss carryforwards. The Taxable Subsidiaries have net capital loss carryforwards from prior years which, if unused, will expire in various taxable years 2025 through 2027. Additionally, the Taxable Subsidiaries have interest expense limitation carryforwards which have an indefinite carryforward period.