Income Taxes

12 Months Ended

Dec. 31, 2020

Effective Tax Rate

The income tax provision consisted of the following amounts:


	Year Ended December 31,
	2020		2019		2018
	(In millions)




Deferred
U.S. Federal	$	7	$	(4)	$	28
State	1		(4)		34
Total — deferred	8		(8)		62
Total income tax expense (benefit)	$	8	$	(8)	$	62

A reconciliation of the U.S. federal statutory rate of 21% to the Company's effective rate is as follows:


	Year Ended December 31,
	2020			2019			2018
	(In millions, except percentages)
Income Before Income Taxes	$	(54)		$	(104)		$	116
Tax at 21%	(11)			(22)			24
State taxes, net of federal benefit	(4)			(7)			8
Deferred state rate change due to deconsolidation from NRG	—			—			20

Impact of non-taxable equity earnings	24			24			8
Investment tax credits	—			(1)			(3)
Production tax credits, including prior year true-up	(1)			(1)			(1)
Valuation allowance adjustment	—			—			3
Rate Change	2			—			—
Other	(2)			(1)			3
Income tax expense (benefit)	$	8		$	(8)		$	62
Effective income tax rate	(14.8)		%	7.7		%	53.4		%

For the year ended December 31, 2020, the overall effective tax rate was different than the statutory rate of 21% primarily due to the taxable earnings and losses allocated to partners’ interest in Clearway Energy LLC, which includes the effects of applying HLBV method of accounting for book purposes of certain partnerships.

For the year ended December 31, 2019, the overall effective tax rate was different than the statutory rate of 21% primarily due to the taxable earnings and losses allocated to partners’ interest in Clearway Energy LLC, which includes the effects of applying HLBV method of accounting for book purposes of certain partnerships.

For the year ended December 31, 2018, the overall effective tax rate was different than the statutory rate of 21% primarily due to higher state income tax rate following the Company’s separation from NRG, as well as taxable earnings and losses allocated to partners’ interest in Clearway Energy LLC, which includes the effects of applying HLBV method of accounting for book purposes of certain partnerships. In 2018, the Company completed the accounting for all of the income tax effects related to the Tax Cuts and Jobs Act, which resulted in no material adjustments in 2018 to the provisional amounts recorded in 2017.

For tax purposes, Clearway Energy LLC is treated as a partnership; therefore, the Company and CEG each record their respective share of taxable income or loss.

The temporary differences, which gave rise to the Company's deferred tax assets, consisted of the following:


	As of December 31,
	2020		2019
	(In millions)
Deferred tax liabilities:
Investment in projects	$	226	$	227
Total deferred tax liabilities	226		227
Deferred tax assets:


Interest expense disallowance carryforward - Investment in Projects	11		50
Production tax credits	9		9
Investment tax credits	5		5
U.S. Federal net operating loss carryforwards	260		215
Capital loss carryforwards	12		12
State net operating loss carryforwards	48		43
Total deferred tax assets	345		334
Valuation allowance	(15)		(15)
Total deferred tax assets, net of valuation allowance	330		319
Net deferred noncurrent tax asset	$	104	$	92

The primary driver for the increase in the net deferred tax asset from $92 million to $104 million as of December 31, 2020, is the increase in federal and state NOLs, partially offset by utilization of the interest disallowance carryforward. As discussed in Note 2, Summary of Significant Accounting Policies, NRG allocated $22 million to the Company in tax-effected state NOLs, which was recorded as a non-cash adjustments to the consolidated statements of stockholders’ equity for the year ended December 31, 2019.

Tax Receivable and Payable

As of December 31, 2020, the Company has no current or long term tax receivable or payable to be recorded.

Deferred Tax Assets and Valuation Allowance

Net deferred tax balance — As of December 31, 2020 and 2019, the Company recorded a net deferred tax asset of $104 million and $92 million, respectively. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income which includes the future reversal of existing taxable temporary differences to realize deferred tax assets. The Company considered the profit before tax generated in recent years, as well as projections of future earnings and estimates of taxable income in arriving at this conclusion. The Company believes that $15 million, a deferred tax asset, for which there are no existing capital gains or available tax planning strategies to utilize the asset in the future may not be realized, resulting in the recording of a valuation allowance.

NOL carryforwards — As of December 31, 2020, the Company had domestic NOLs carryforwards for federal income tax purposes of $260 million and cumulative state NOLs of $48 million tax-effected.

Interest disallowance carryforward — As of December 31, 2020, the Company has a deferred tax asset of $11 million related to disallowed interest expense under the proposed IRC §163(j) regulation.

The disallowed interest deduction has an indefinite carry forward period and any limitations on the utilization of this carryforward have been factored into the valuation allowance analysis.

Uncertain Tax Positions

The Company had no identified uncertain tax positions that require evaluation as of December 31, 2020.