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INCOME TAXES | 9 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES We have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code and have a tax year end of December 31. In order to qualify as a RIC, we must annually distribute at least 90% of our investment company taxable income, as defined by the Code, to our shareholders in a timely manner. Investment company income generally includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its ordinary income and capital gains that is distributed to its shareholders, including “deemed distributions” as discussed below. As part of maintaining RIC tax treatment, undistributed taxable income and capital gain, which is subject to a 4% non-deductible U.S. federal excise tax, pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (1) the extended due date of the U.S. federal income tax return for the applicable fiscal year and (2) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated. As of December 31, 2022, CSWC qualified for RIC tax treatment. We intend to meet the applicable qualifications to be taxed as a RIC in future periods. However, the Company’s ability to meet certain portfolio diversification requirements of RICs in future years may not be controllable by the Company. Book and tax basis differences relating to dividends and distributions to our shareholders and other permanent book and tax differences are typically reclassified among the CSWC’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from U.S. GAAP; accordingly, for the nine months ended December 31, 2022 and 2021, CSWC reclassified for book purposes amounts arising from permanent book/tax differences related to the tax treatment of return of capital and/or deemed distributions, tax treatment of investments upon disposition, and non-deductible expenses, as follows (amounts in thousands):
| Nine Months Ended December 31,
| 2022 |  | 2021
Additional capital | $ | (5,126) |  |  | $ | (6,255) |
Total distributable earnings | 5,126 |  |  | 6,255 |
The determination of the tax attributes for CSWC’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, any determination made on an interim basis is forward-looking based on currently available facts, rules and assumptions and may not be representative of the actual tax attributes of distributions for a full year. During the quarter ended March 31, 2022, CSWC declared total dividends of $11.8 million, or $0.48 per share. During the quarter ended June 30, 2022, CSWC declared total dividends of $16.6 million, or $0.63 per share ($0.48 per share in regular dividends and $0.15 per share in special dividends). During the quarter ended September 30, 2022, CSWC declared total dividends of $14.3 million, or $0.50 per share. During the quarter ended December 31, 2022, CSWC declared total dividends of $19.3 million, or $0.57 per share ($0.52 per share in regular dividends and $0.05 per share in supplemental dividends). Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate 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 capital gains, but may also include qualified dividends or return of capital. The tax character of distributions paid for the years ended December 31, 2022 and 2021 was as follows (amounts in thousands):
| Twelve Months Ended December 31,
| 2022 |  | 2021
Ordinary income | $ | 60,960 |  |  | $ | 56,633 |
Distributions of long term capital gains | — |  |  | — |
Distributions on tax basis | $ | 60,960 |  |  | $ | 56,633 |
The following reconciles net increase in net assets resulting from operations to estimated RIC taxable income for the nine months ended December 31, 2022 and 2021:
| Nine Months Ended December 31,
Reconciliation of RIC Distributable Income 1 | 2022 |  | 2021
Net increase in net assets from operations | $ | 14,917 |  |  | $ | 23,146 |
Net unrealized depreciation (appreciation) on investments | 13,989 |  |  | (4,306) |
Income/gain (expense/loss) recognized for tax on pass-through entities | 10 |  |  | 1,558 |
(Gain) loss recognized on dispositions | (1,473) |  |  | 329 |
Capital loss carryover 2 | 14,454 |  |  | 308 |
Net operating income - wholly-owned subsidiary | 1,071 |  |  | (9,186) |
Dividend income from wholly-owned subsidiary | 1,068 |  |  | — |
Non-deductible tax expense | 466 |  |  | 191 |
Loss on extinguishment of debt | — |  |  | 12,950 |
Non-deductible compensation | 2,443 |  |  | 2,688 |
Compensation related book/tax differences | (1,471) |  |  | 2,542 |
Other book/tax differences | 1,839 |  |  | 3,518 |
Estimated distributable income before deductions for distributions | $ | 47,313 |  |  | $ | 33,738 |
1 The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax return each year. Final taxable income may be different than this estimate. 2 At December 31, 2022, the Company had long-term capital loss carryforwards of $31.9 million to offset future capital gains. These capital loss carryforwards are not subject to expiration. A RIC may elect to retain all or a portion of its net capital gains by designating them as a “deemed distribution” to its shareholders and paying a federal tax on the net capital gains for the benefit of its shareholders. Shareholders then report their share of the retained capital gains on their income tax returns as if it had been received and report a tax credit for tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemed distribution” net of such tax to the basis of their shares. In addition, the Taxable Subsidiary holds a portion of one or more of our portfolio investments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary is consolidated for financial reporting purposes in accordance with U.S. GAAP, so that our consolidated financial statements reflect our investments in the portfolio companies owned by the Taxable Subsidiary. The purpose of the Taxable Subsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross income for U.S. federal income tax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership or LLC (or other pass-through entity) portfolio investment would flow through directly to us. To the extent that our income did not consist of investment income, it could jeopardize our ability to qualify as a RIC and therefore cause us to incur significant amounts of U.S. federal income taxes at corporate rates. Where interests in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, however, the income from those interests is taxed to the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RIC tax treatment and resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S. federal income tax purposes and may generate an income tax provision as a result of their ownership of the portfolio companies. The income tax provision, or benefit, and the related tax assets and liabilities, if any, are reflected in our Statement of Operations. As of December 31, 2022, the cost of investments held at the RIC for U.S. federal income tax purposes was $1,116.8 million, with such investments having gross unrealized appreciation of $9.7 million and gross unrealized depreciation of $64.3 million, resulting in net unrealized depreciation of $54.6 million. As of December 31, 2022, the cost of investments held at the Taxable Subsidiary for U.S. federal income tax purposes was $33.8 million, with such investments having gross unrealized appreciation of $57.2 million and gross unrealized depreciation of $2.4 million, resulting in net unrealized appreciation of $54.8 million. On a consolidated basis, the total investment portfolio has net unrealized appreciation of $0.2 million for U.S. federal income tax purposes. The Taxable Subsidiary is not a RIC and is required to pay taxes at the current corporate rate. For tax purposes, the Taxable Subsidiary has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate an income tax provision or benefit. The taxable income, or loss, of the Taxable Subsidiary may differ from book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax provision, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements. The Taxable Subsidiary records valuation adjustments related to its investments on a quarterly basis. Deferred taxes related to the unrealized gain/loss on investments are also recorded on a quarterly basis. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Establishing a valuation allowance of a deferred tax asset requires management to make estimates related to expectations of future taxable income. As of December 31, 2022 and March 31, 2022, the Taxable Subsidiary had a deferred tax liability of $11.4 million and $5.7 million, respectively. Based on our assessment of our unrecognized tax benefits, management believes that all benefits will be realized and they do not contain any uncertain tax positions. The following table sets forth the significant components of the deferred tax assets and liabilities as of December 31, 2022 and March 31, 2022 (amounts in thousands):
| December 31, 2022 |  | March 31, 2022
Deferred tax asset: |  |  |
Net operating loss carryforwards | $ | — |  |  | $ | — |
Interest | 220 |  | 185 |
Total deferred tax asset | 220 |  | 185
Deferred tax liabilities: |  |  |
Net unrealized appreciation on investments | (10,911) |  |  | (4,899) |
Net basis differences in portfolio investments | (736) |  |  | (1,033) |
Total deferred tax liabilities | (11,647) |  |  | (5,932) |
Total net deferred tax (liabilities) assets | $ | (11,427) |  |  | $ | (5,747) |
The income tax provision, or benefit, and the related tax assets and liabilities, generated by CSWC and the Taxable Subsidiary, if any, are reflected in CSWC’s consolidated financial statements. For the three months ended December 31, 2022, we recognized a net income tax benefit of $0.7 million, principally consisting of a $0.2 million accrual for U.S. federal excise tax and $0.9 million of tax benefit relating to the Taxable Subsidiary. For the nine months ended December 31, 2022, we recognized a net income tax benefit of $20.6 thousand, principally consisting of a $0.5 million accrual for U.S. federal excise tax and a $0.5 million tax benefit relating to the Taxable Subsidiary. For the three months ended December 31, 2021, we recognized a net income tax benefit of $0.1 million, principally consisting of a $0.1 million accrual for U.S. federal excise tax and a $0.2 million tax benefit relating to the Taxable Subsidiary. For the nine months ended December 31, 2021, we recognized a net income tax provision of $0.6 million, principally consisting of a $0.2 million accrual for U.S. federal excise tax and a $0.4 million tax provision relating to the Taxable Subsidiary. Although we believe our tax returns are correct, the final determination of tax examinations could be different from what was reported on the returns. In our opinion, we have made adequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute of limitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2019 through December 31, 2021. The following table sets forth the significant components of income tax provision as of December 31, 2022 and 2021 (amounts in thousands):
| Nine Months Ended December 31,
Components of Income Tax Provision | 2022 |  | 2021
Excise tax | $ | 468 |  |  | $ | 191 |
Tax (benefit) provision related to Taxable Subsidiary | (488) |  |  | 457 |
Total income tax (benefit) provision | $ | (20) |  |  | $ | 648 |

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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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