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Income Taxes | 12 Months Ended
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Dec. 31, 2021
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The income tax provision from continuing operations consisted of the following amounts:
| Year Ended December 31,
(In millions, except effective income tax rate) | 2021 |  | 2020 |  | 2019
Current |  |  |  |  |
State | $ | 48 |  |  | $ | 22 |  |  | $ | 2 |
Foreign | 3 |  |  | 4 |  |  | 4 |
Total — current | 51 |  |  | 26 |  |  | 6 |
Deferred |  |  |  |  |
U.S. Federal | 569 |  |  | 168 |  |  | (3,000) |
State | 36 |  |  | 60 |  |  | (340) |
Foreign | 16 |  |  | (3) |  |  | — |
Total — deferred | 621 |  |  | 225 |  |  | (3,340) |
Total income tax expense/(benefit) | $ | 672 |  |  | $ | 251 |  |  | $ | (3,334) |
Effective income tax rate | 23.5 | % |  | 33.0 | % |  | (424.2) | %
During the year ended December 31, 2019, NRG released the majority of its valuation allowance against its U.S. federal and state deferred tax assets, resulting in a non-cash benefit to income tax expense of approximately $3.5 billion. In making the determination to release the majority of the valuation allowance as of December 31, 2019, the Company evaluated a number of factors, including its recent history of pre-tax earnings, utilization of $593 million of NOLs in 2019, as well as its forecasted future pre-tax earnings. Based on this evaluation, the Company determined that the majority of its future tax benefits are more-likely-than-not to be realized. Given the Company’s current level of pre-tax earnings and forecasted future pre-tax earnings, the Company expects to generate income before taxes in the U.S. in future periods at a level that would fully utilize its U.S. federal NOL carryforwards and the majority of its state NOL carryforwards prior to their expiration. On March 27, 2020, the Senate passed the CARES Act to provide emergency relief related to the COVID-19 pandemic. The CARES Act contains federal income tax provisions which, among other things: (i) increases the amount of interest expense that businesses are allowed to deduct by increasing the adjusted taxable income limitation from 30% to 50% for tax years that begin in 2019 and 2020; (ii) permits businesses to carry back to each of the five tax years NOLs arising from tax years beginning after December 31, 2017 and before January 1, 2020; and (iii) temporarily removes the 80% limitation on NOLs until tax years beginning after 2020. The CARES Act provisions did not have a material impact on the tax positions of the Company. The following represented the domestic and foreign components of income from continuing operations before income taxes:
| Year Ended December 31,
(In millions) | 2021 |  | 2020 |  | 2019
U.S. | $ | 2,759 |  |  | $ | 749 |  |  | $ | 771 |
Foreign | 100 |  |  | 12 |  |  | 15 |
Total | $ | 2,859 |  |  | $ | 761 |  |  | $ | 786 |
Reconciliations of the U.S. federal statutory tax rate to NRG's effective tax rate were as follows:
| Year Ended December 31,
(In millions, except effective income tax rate) | 2021 |  | 2020 |  | 2019
Income from continuing operations before income taxes | $ | 2,859 |  |  | $ | 761 |  |  | $ | 786 |
Tax at federal statutory tax rate | 600 |  |  | 160 |  |  | 165 |
Foreign rate differential | (3) |  |  | — |  |  | — |
State taxes | 111 |  |  | 18 |  |  | 13 |
Permanent differences | 8 |  |  | 8 |  |  | (9) |
Changes in valuation allowance | (29) |  |  | 24 |  |  | (3,492) |
Deferred impact of state tax rate changes | (10) |  |  | 2 |  |  | 12 |
Recognition of uncertain tax benefits | (10) |  |  | 3 |  |  | (10) |
Return to provision adjustments | 5 |  |  | 36 |  |  | — |
Other | — |  |  | — |  |  | (13) |
Income tax expense/(benefit) | $ | 672 |  |  | $ | 251 |  |  | $ | (3,334) |
Effective income tax rate | 23.5 | % |  | 33.0 | % |  | (424.2) | %
For the year ended December 31, 2021, NRG's effective income tax rate was higher than the federal statutory tax rate of 21% primarily due to state tax expense partially offset by tax benefits from the revaluation of state deferred tax assets, valuation allowance, and settlements of uncertain tax positions. For the year ended December 31, 2020, NRG's effective income tax rate was higher than the federal statutory tax rate of 21% primarily due to state tax expense, the recognition of state valuation allowance on NOLs, and return to provision adjustments. For the year ended December 31, 2019, NRG's effective income tax rate was lower than the federal statutory tax rate of 21% primarily due to the tax benefit from the release of the valuation allowance. The temporary differences, which gave rise to the Company's deferred tax assets and liabilities consisted of the following:
| As of December 31,
(In millions) | 2021 |  | 2020
Deferred tax assets: |  |  |
Deferred compensation, accrued vacation and other reserves | $ | 114 |  |  | $ | 79 |
Difference between book and tax basis of property | 436 |  |  | 357 |
Pension and other postretirement benefits | 65 |  |  | 86 |
Equity compensation | 7 |  |  | 10 |
Bad debt reserve | 168 |  |  | 16 |
Derivatives, net | — |  |  | 11 |
U.S. Federal net operating loss carryforwards | 1,773 |  |  | 2,117 |
Foreign net operating loss carryforwards | 112 |  |  | 102 |
State net operating loss carryforwards | 328 |  |  | 351 |
Federal and state tax credit carryforwards | 384 |  |  | 384 |
Federal benefit on state uncertain tax positions | 3 |  |  | 4 |
Interest disallowance carryforward per §163(j) of the Tax Act | 6 |  |  | 4 |
Inventory obsolescence | 9 |  |  | 6 |
Other | 15 |  |  | 10 |
Total deferred tax assets | 3,420 |  |  | 3,537 |
Deferred tax liabilities: |  |  |
Emissions allowances | 20 |  |  | 21 |
Derivatives | 591 |  |  | — |
Goodwill | 40 |  |  | 29 |
Intangibles amortization (excluding goodwill) | 363 |  |  | 2 |
Equity method investments | 62 |  |  | 156 |
Convertible Debt | 14 |  |  | 16 |
Total deferred tax liabilities | 1,090 |  |  | 224 |
Total deferred tax assets less deferred tax liabilities | 2,330 |  |  | 3,313 |
Valuation allowance | (248) |  |  | (266) |
Total net deferred tax assets, net of valuation allowance | $ | 2,082 |  |  | $ | 3,047 |
The following table summarizes NRG's net deferred tax position as presented in the consolidated balance sheets:
| As of December 31,
(In millions) | 2021 |  | 2020
Deferred tax asset | $ | 2,155 |  |  | $ | 3,066 |
Deferred tax liability | (73) |  |  | (19) |
Net deferred tax asset | $ | 2,082 |  |  | $ | 3,047 |
The primary drivers for the decrease in the net deferred tax asset from $3.0 billion as of December 31, 2020 to $2.1 billion as of December 31, 2021 are an increase in mark-to-market book gains and step-up in basis of book intangibles associated with the acquisition of Direct Energy. Deferred tax assets and valuation allowance Net deferred tax balance — As of December 31, 2021 and 2020, NRG recorded a net deferred tax asset, excluding valuation allowance, of $2.3 billion and $3.3 billion, respectively. The Company believes certain state net operating losses may not be realizable under the more-likely-than-not measurement and as such, a valuation allowance was recorded as of December 31, 2021 as discussed below. NOL carryforwards — As of December 31, 2021, the Company had tax-effected cumulative U.S. NOLs consisting of carryforwards for federal and state income tax purposes of $1.8 billion and $328 million, respectively. The Company estimates it will need to generate future taxable income to fully realize the net federal deferred tax asset before the expiration of certain carryforwards commences in 2031. In addition, NRG has tax-effected cumulative foreign NOL carryforwards of $112 million with no expiration date. Valuation allowance — As of December 31, 2021, the Company's tax-effected valuation allowance was $248 million, consisting of state NOL carryforwards and foreign NOL carryforwards. The valuation allowance was recorded based on the assessment of cumulative and forecasted pre-tax book earnings and the future reversal of existing taxable temporary differences. Taxes Receivable and Payable As of December 31, 2021, NRG recorded a current net federal receivable of $16 million, comprised of refunds due from the IRS, a current net state tax payable of $13 million that is primarily comprised of Texas margin tax, and a current net foreign receivable of $11 million due to filings of Canadian amended returns as well as prepayments of estimated taxes. Uncertain tax benefits NRG has identified uncertain tax benefits with after-tax value of $13 million and $15 million as of December 31, 2021 and 2020, for which NRG has recorded a non-current tax liability of $14 million and $18 million, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company recognized an immaterial amount of interest expense for the year ended December 31, 2021, and $1 million for the years ended 2020 and 2019. As of December 31, 2021 and 2020, NRG had cumulative interest and penalties related to these uncertain tax benefits of $1 million and $3 million, respectively. Tax jurisdictions — NRG is subject to examination by taxing authorities for income tax returns filed in the U.S. federal jurisdiction and various state and foreign jurisdictions including operations located in Australia and Canada. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2018. With few exceptions, state and Canadian income tax examinations are no longer open for years before 2013. The following table summarizes uncertain tax benefits activity:
| As of December 31,
(In millions) | 2021 |  | 2020
Balance as of January 1 | $ | 15 |  |  | $ | 15 |
Increase due to current year positions | 4 |  |  | 3 |
Increase due to acquired balance from Direct Energy | 9 |  |  | — |
Settlements, payments and statute closure | (15) |  |  | (3) |
Uncertain tax benefits as of December 31 | $ | 13 |  |  | $ | 15 |

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=122134291&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=121826272&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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