Annual report pursuant to Section 13 and 15(d)

DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

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DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
Main Street currently pays regular monthly dividends to its stockholders and periodically pays supplemental dividends to its stockholders. Future dividends, if any, will be determined by its Board of Directors on a quarterly basis. During 2023, Main Street paid regular monthly dividends of $0.225 per share for each month of January through June, regular monthly dividends of $0.23 per share for each month of July through September and regular monthly dividends of $0.235 per share for each month of October through December. The 2023 regular monthly dividends, which total $224.3 million, or $2.745 per share, represent a 5.8% increase from the regular monthly dividends paid totaling $192.3 million, or $2.595 per share, for the year ended December 31, 2022.
During 2023, Main Street also paid supplemental dividends of $0.175 per share in March, $0.225 per share in June, $0.275 per share in September and $0.275 per share in December, totaling $78.6 million, or $0.95 per share. During 2022, Main Street paid supplemental dividends of $0.075 per share in March, $0.075 per share in June, $0.10 per share in September and $0.10 per share in December, totaling $26.4 million, or $0.35 per share.
During 2023, the regular monthly dividends and supplemental dividends paid totaled $302.9 million, or $3.695 per share, representing a 25.5% increase from the total dividends paid during the year ended December 31, 2022. During the year ended December 31, 2022, the regular monthly dividends and supplemental dividends paid totaled $218.7 million, or $2.945 per share.
For tax purposes, the 2023 dividends were comprised of (i) ordinary income totaling $3.394 per share and (ii) qualified dividend income totaling $0.301 per share. As of December 31, 2023, Main Street estimates that it has generated undistributed taxable income of $76.5 million, or $0.90 per share, that will be carried forward toward distributions to be paid in 2024.
MSCC has elected to be treated for U.S. federal income tax purposes as a RIC. MSCC’s taxable income includes the taxable income generated by MSCC and certain of its subsidiaries, including the Funds and Structured Subsidiaries, which are treated as disregarded entities for tax purposes. As a RIC, MSCC generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that MSCC distributes to its stockholders. MSCC 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 Main Street’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) $ 278,165  $ 195,238  $ 129,625 
Qualified dividends 24,100  22,991  47,202 
Distributions on tax basis $ 302,265  $ 218,229  $ 176,827 
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(1)The years ended December 31, 2023, 2022 and 2021 include $3.3 million, $2.3 million and $1.8 million, respectively, that was reported for tax purposes as compensation for services in accordance with Section 83 of the Code.
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 $ 428,447  $ 241,606  $ 330,762 
Book-tax difference from share-based compensation expense 962  142  (3,213)
Net unrealized appreciation (232,577) (24,816) (135,624)
Income tax provision 22,642  23,325  32,863 
Pre-tax book loss (income) not consolidated for tax purposes 20,726  (37,630) (59,634)
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates 72,389  17,043  39,819 
Estimated taxable income (1) 312,589  219,670  204,973 
Taxable income earned in prior year and carried forward for distribution in current year 49,216  50,834  24,359 
Taxable income earned prior to period end and carried forward for distribution next period (76,510) (66,892) (65,994)
Dividend payable as of period end and paid in the following period 20,368  17,676  15,159 
Total distributions accrued or paid to common stockholders $ 305,663  $ 221,288  $ 178,497 
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(1)MSCC’s taxable income for each period is an estimate and will not be finally determined until MSCC 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 Main Street. The Taxable Subsidiaries permit Main Street 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 MSCC for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in Main Street’s consolidated financial statements as portfolio investments and recorded at fair value. The Taxable Subsidiaries are not consolidated with MSCC 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 Main Street’s consolidated financial statements.
The income tax provision for Main Street 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 (benefit), which is primarily the result of current U.S. federal income and state taxes and excise taxes on Main Street’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 Main Street’s Consolidated Statements of Operations. Main Street’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 (benefit):
Federal $ 1,198  $ 516  $ (235)
State 2,245  1,845  3,377 
Excise 3,190  2,838  2,590 
Total current tax expense 6,633  5,199  5,732 
Deferred tax expense:
Federal 14,181  13,176  23,205 
State 1,828  4,950  3,926 
Total deferred tax expense 16,009  18,126  27,131 
Total income tax provision $ 22,642  $ 23,325  $ 32,863 
MSCC 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, MSCC 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 Main Street’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 $3,602.7 million, with such investments having an estimated net unrealized appreciation of $683.7 million, composed of gross unrealized appreciation of $970.4 million and gross unrealized depreciation of $286.7 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 $ 39,079  $ 35,043 
Interest expense carryforwards 20,126  6,171 
Other 4,190  3,401 
Total deferred tax assets 63,395  44,615 
Deferred tax liabilities:
Net unrealized appreciation of portfolio investments (90,981) (64,219)
Net basis differences in portfolio investments (36,272) (28,245)
Total deferred tax liabilities (127,253) (92,464)
Total deferred tax liabilities, net $ (63,858) $ (47,849)
The net deferred tax liability at December 31, 2023 and 2022 was $63.9 million and $47.8 million, respectively, with the change primarily related to changes in net unrealized appreciation or depreciation, changes in loss or interest expense carryforwards, and other temporary book-tax differences relating to portfolio investments held by the Taxable Subsidiaries. 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, Main Street did not record a valuation allowance related to its deferred tax assets at December 31, 2023 and 2022. At December 31, 2023, for U.S. federal income tax purposes, the Taxable Subsidiaries had a net operating loss carryforward from prior years which, if unused, will expire in various taxable years from 2035 through 2037. Any net operating losses generated in 2018 and future periods are not subject to expiration and will carryforward indefinitely until utilized. 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, MSCC had net capital loss carryforwards totaling $60.3 million available to offset future capital gains, to the extent available and permitted by U.S. federal income tax law. However, as long as MSCC maintains its RIC status, any capital loss carryforwards at the RIC are not subject to a federal income tax-effect and are not subject to an expiration date.