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Income Taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The income tax provision consisted of the following amounts:
| Year Ended December 31,
(In millions, except effective income tax rate) | 2022 |  | 2021 |  | 2020
Current |  |  |  |  |
U.S. Federal | $ | 3 |  |  | $ | — |  |  | $ | — |
State | 65 |  |  | 48 |  |  | 22 |
Foreign | 3 |  |  | 3 |  |  | 4 |
Total — current | 71 |  |  | 51 |  |  | 26 |
Deferred |  |  |  |  |
U.S. Federal | 258 |  |  | 569 |  |  | 168 |
State | 59 |  |  | 36 |  |  | 60 |
Foreign | 54 |  |  | 16 |  |  | (3) |
Total — deferred | 371 |  |  | 621 |  |  | 225 |
Total income tax expense | $ | 442 |  |  | $ | 672 |  |  | $ | 251 |
Effective income tax rate | 26.6 | % |  | 23.5 | % |  | 33.0 | %
The IRA enacted on August 16, 2022, introduced new provisions including a 15% corporate book minimum tax and a 1% excise tax on net share repurchases with both taxes effective beginning in fiscal year 2023 for NRG. The Company will continue to evaluate the impact of the corporate book minimum tax when the U.S. Treasury and the IRS release further guidance. Additionally, the IRA establishes a production tax credit associated with existing nuclear facilities which begins in 2024 and terminates at the end of 2031. The production tax credit will fully apply when gross revenues are at or below $25 per MWh and phases out completely at $43.75 per MWh. The U.S. Treasury is in the process of defining the methods by which gross revenues may be calculated pursuant to the IRA. 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 before income taxes:
| Year Ended December 31,
(In millions) | 2022 |  | 2021 |  | 2020
U.S. | $ | 1,436 |  |  | $ | 2,759 |  |  | $ | 749 |
Foreign | 227 |  |  | 100 |  |  | 12 |
Total | $ | 1,663 |  |  | $ | 2,859 |  |  | $ | 761 |
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) | 2022 |  | 2021 |  | 2020
Income before income taxes | $ | 1,663 |  |  | $ | 2,859 |  |  | $ | 761 |
Tax at federal statutory tax rate | 349 |  |  | 600 |  |  | 160 |
Foreign rate differential | 7 |  |  | (3) |  |  | — |
State taxes | 69 |  |  | 111 |  |  | 18 |
Permanent differences | 17 |  |  | 8 |  |  | 8 |
Changes in valuation allowance | (3) |  |  | (29) |  |  | 24 |
Deferred impact of state tax rate changes | 14 |  |  | (10) |  |  | 2 |
Recognition of uncertain tax benefits | 8 |  |  | (10) |  |  | 3 |
Carbon capture tax credits | (19) |  |  | — |  |  | — |
Return to provision adjustments | — |  |  | 5 |  |  | 36 |
Income tax expense | $ | 442 |  |  | $ | 672 |  |  | $ | 251 |
Effective income tax rate | 26.6 | % |  | 23.5 | % |  | 33.0 | %
For the year ended December 31, 2022, 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 the recognition of carbon capture tax credits. 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. 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) | 2022 |  | 2021
Deferred tax assets: |  |  |
Deferred compensation, accrued vacation and other reserves | $ | 93 |  |  | $ | 114 |
Difference between book and tax basis of property | 399 |  |  | 436 |
Pension and other postretirement benefits | 62 |  |  | 65 |
Equity compensation | 8 |  |  | 7 |
Allowance for credit losses | 33 |  |  | 168 |
U.S. Federal net operating loss carryforwards | 1,717 |  |  | 1,773 |
Foreign net operating loss carryforwards | 104 |  |  | 112 |
State net operating loss carryforwards | 315 |  |  | 328 |
Federal and state tax credit carryforwards | 393 |  |  | 384 |
Federal benefit on state uncertain tax positions | 5 |  |  | 3 |
Interest disallowance carryforward per §163(j) of the Tax Act | 65 |  |  | 6 |
Inventory obsolescence | 10 |  |  | 9 |
U.S. capital loss | 15 |  |  | — |
Other | 22 |  |  | 15 |
Total deferred tax assets | 3,241 |  |  | 3,420 |
Deferred tax liabilities: |  |  |
Emissions allowances | 19 |  |  | 20 |
Derivatives | 874 |  |  | 591 |
Goodwill | 26 |  |  | 40 |
Intangibles amortization (excluding goodwill) | 269 |  |  | 363 |
Equity method investments | 82 |  |  | 62 |
Convertible Debt | — |  |  | 14 |
Total deferred tax liabilities | 1,270 |  |  | 1,090 |
Total deferred tax assets less deferred tax liabilities | 1,971 |  |  | 2,330 |
Valuation allowance | (224) |  |  | (248) |
Total net deferred tax assets, net of valuation allowance | $ | 1,747 |  |  | $ | 2,082 |
The following table summarizes NRG's net deferred tax position as presented in the consolidated balance sheets:
| As of December 31,
(In millions) | 2022 |  | 2021
Deferred tax asset | $ | 1,881 |  |  | $ | 2,155 |
Deferred tax liability | (134) |  |  | (73) |
Net deferred tax asset | $ | 1,747 |  |  | $ | 2,082 |
The primary drivers for the decrease in the net deferred tax asset from $2.1 billion as of December 31, 2021 to $1.7 billion as of December 31, 2022 is an increase in unrealized mark-to-market book gains on derivative instruments. Deferred tax assets and valuation allowance Net deferred tax balance — As of December 31, 2022 and 2021, NRG recorded a net deferred tax asset, excluding valuation allowance, of $2.0 billion and $2.3 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, 2022 as discussed below. NOL carryforwards — As of December 31, 2022, the Company had tax-effected cumulative U.S. NOLs consisting of carryforwards for federal and state income tax purposes of $1.7 billion and $315 million, respectively. In addition, NRG has tax-effected cumulative foreign NOL carryforwards of $104 million. The majority of NRG's NOL carryforwards have no expiration date. Valuation allowance — As of December 31, 2022, the Company's tax-effected valuation allowance was $224 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, 2022, NRG recorded a current net federal receivable of $5 million and a current net foreign receivable of $13 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 $22 million and $13 million as of December 31, 2022 and 2021, for which NRG has recorded a non-current tax liability of $24 million and $14 million, respectively. The Company recognizes interest and penalties related to uncertain tax benefits in income tax expense. The Company recognized $1 million of interest expense for the year ended December 31, 2022, an immaterial amount for the year ended 2021 and $1 million for the year ended 2020. As of December 31, 2022 and 2021, NRG had cumulative interest and penalties related to these uncertain tax benefits of $2 million and $1 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 2019. With few exceptions, state and Canadian income tax examinations are no longer open for years before 2014. The following table summarizes uncertain tax benefits activity:
| As of December 31,
(In millions) | 2022 |  | 2021
Balance as of January 1 | $ | 13 |  |  | $ | 15 |
Increase due to current year positions | 9 |  |  | 4 |
Increase due to acquired balance from Direct Energy | — |  |  | 9 |
Settlements, payments and statute closure | — |  |  | (15) |
Uncertain tax benefits as of December 31 | $ | 22 |  |  | $ | 13 |

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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 https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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