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Income Taxes
 9 Months Ended
Sep. 30, 2021
Income Taxes INCOME TAXES
The disclosures in this note apply to all Registrants unless indicated otherwise.

Effective Tax Rates (ETR)

The Registrants’ interim ETR reflect the estimated annual ETR for 2021 and 2020, adjusted for tax expense associated with certain discrete items.

The Registrants include the amortization of Excess ADIT not subject to normalization requirements in the annual estimated ETR when regulatory proceedings instruct the Registrants to provide the benefits of Tax Reform to customers over multiple interim periods.  Certain regulatory proceedings instruct the Registrants to provide the benefits of Tax Reform to customers in a single period (e.g. by applying the Excess ADIT not subject to normalization requirements against an existing regulatory asset balance) and in these circumstances, the Registrants recognize the tax benefit discretely in the period recorded. The annual amount of Excess ADIT approved by the Registrant’s regulatory commissions may not impact the ETR ratably during each interim period due to the variability of pretax book income between interim periods and the application of an annual estimated ETR.

The ETR for each of the Registrants are included in the following tables:
Three Months Ended September 30, 2021
AEPAEP TexasAEPTCoAPCoI&MOPCoPSOSWEPCo
U.S. Federal Statutory Rate21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %
Increase (decrease) due to:
State Income Tax, net of Federal Benefit
0.6 %0.3 %3.0 %(0.3)%1.9 %1.2 %5.0 %(6.9)%
Tax Reform Excess ADIT Reversal
(8.5)%(6.3)%0.3 %(14.2)%(16.1)%(8.9)%(19.8)%(4.2)%
Production and Investment Tax Credits
(4.7)%(0.3)%— %(0.2)%(2.0)%— %(8.9)%(5.4)%
Flow Through
— %0.3 %0.3 %0.4 %(2.8)%0.6 %0.7 %(0.2)%
AFUDC Equity
(1.2)%(1.0)%(2.2)%(1.8)%(1.0)%(0.3)%(0.2)%(0.5)%
Parent Company Loss Benefit
— %(1.1)%(2.3)%(1.2)%(3.6)%— %— %0.7 %
Discrete Tax Adjustments
0.2 %— %— %— %— %— %— %1.2 %
Other
0.7 %(0.1)%0.1 %0.3 %0.8 %— %(0.1)%(0.2)%
Effective Income Tax Rate8.1 %12.8 %20.2 %4.0 %(1.8)%13.6 %(2.3)%5.5 %
Three Months Ended September 30, 2020
AEPAEP TexasAEPTCoAPCoI&MOPCoPSOSWEPCo
U.S. Federal Statutory Rate21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %
Increase (decrease) due to:
State Income Tax, net of Federal Benefit
2.7 %2.0 %2.9 %3.1 %3.4 %0.8 %4.6 %2.4 %
Tax Reform Excess ADIT Reversal
(11.0)%(14.6)%0.4 %(22.0)%(16.7)%(6.7)%(20.3)%(7.3)%
Production and Investment Tax Credits
(4.6)%(0.5)%— %— %(1.6)%— %(1.1)%(0.5)%
Flow Through
0.5 %0.2 %0.5 %1.6 %0.2 %0.9 %0.2 %(1.2)%
AFUDC Equity
(1.5)%(3.5)%(2.6)%(1.1)%(0.9)%(0.9)%(0.6)%(0.3)%
Parent Company Loss Benefit
— %— %(0.9)%(3.1)%(3.7)%(0.3)%(1.7)%(2.0)%
Discrete Tax Adjustments (a)(7.4)%(3.6)%(0.2)%(6.6)%2.3 %8.4 %(0.6)%(0.6)%
Other
0.1 %0.3 %0.1 %— %— %0.3 %0.1 %(0.6)%
Effective Income Tax Rate(0.2)%1.3 %21.2 %(7.1)%4.0 %23.5 %1.6 %10.9 %
Nine Months Ended September 30, 2021
AEPAEP TexasAEPTCoAPCoI&MOPCoPSOSWEPCo
U.S. Federal Statutory Rate21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %
Increase (decrease) due to:
State Income Tax, net of Federal Benefit
1.2 %0.3 %2.8 %1.5 %1.6 %0.8 %4.8 %(3.4)%
Tax Reform Excess ADIT Reversal
(8.9)%(7.2)%0.3 %(15.2)%(17.7)%(9.1)%(19.8)%(4.3)%
Production and Investment Tax Credits
(4.9)%(0.3)%— %— %(2.2)%— %(8.1)%(4.6)%
Flow Through
0.2 %0.3 %0.3 %1.7 %(3.0)%0.9 %0.7 %(0.2)%
AFUDC Equity
(1.1)%(1.1)%(1.9)%(1.2)%(1.0)%(0.8)%(0.3)%(0.6)%
Parent Company Loss Benefit
— %(0.7)%(1.9)%(1.3)%(2.8)%— %— %— %
Discrete Tax Adjustments
1.1 %— %— %— %— %(1.3)%(0.9)%0.6 %
Other
0.1 %— %— %0.1 %0.4 %0.2 %(0.2)%(0.1)%
Effective Income Tax Rate8.7 %12.3 %20.6 %6.6 %(3.7)%11.7 %(2.8)%8.4 %
Nine Months Ended September 30, 2020
AEPAEP TexasAEPTCoAPCoI&MOPCoPSOSWEPCo
U.S. Federal Statutory Rate21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %21.0 %
Increase (decrease) due to:
State Income Tax, net of Federal Benefit
2.6 %1.8 %2.9 %3.1 %3.4 %0.7 %4.6 %2.3 %
Tax Reform Excess ADIT Reversal
(12.1)%(23.4)%0.4 %(20.8)%(16.7)%(8.8)%(20.3)%(11.5)%
Production and Investment Tax Credits
(4.5)%(0.5)%— %— %(1.6)%— %(1.1)%(0.5)%
Flow Through
0.5 %0.1 %0.5 %1.6 %0.2 %0.9 %0.2 %(1.2)%
AFUDC Equity
(1.5)%(3.2)%(2.6)%(1.1)%(0.9)%(0.9)%(0.6)%(0.3)%
Parent Company Loss Benefit
— %— %(0.9)%(3.1)%(3.7)%(0.3)%(1.7)%(1.9)%
Discrete Tax Adjustments (a)(3.0)%(1.6)%(0.1)%(2.3)%1.8 %2.6 %(0.4)%(0.3)%
Other
0.2 %0.4 %(0.1)%(0.1)%(0.1)%0.2 %0.1 %(0.4)%
Effective Income Tax Rate3.2 %(5.4)%21.1 %(1.7)%3.4 %15.4 %1.8 %7.2 %

(a)The discrete tax expense is primarily attributable to the $48 million benefit recognized as a result of the 5-year net operating losses (NOL) carryback provision of the CARES Act.

Federal and State Income Tax Audit Status

The statute of limitations for the IRS to examine AEP and subsidiaries originally filed federal return has expired for tax years 2016 and earlier. In the third quarter of 2019, AEP and subsidiaries elected to amend the 2014 through 2017 federal returns. In the first quarter of 2020, the IRS notified AEP that it was beginning an examination of these amended returns, including the NOL carryback to 2015 that originated in the 2017 return. As of September 30, 2021, the IRS has not challenged any items on these returns and the IRS is limited in their proposed adjustments to the amount AEP claimed on the amended returns. AEP has agreed to extend the statute of limitations on the 2017 tax return to December 31, 2022 to allow time for the audit to be completed and the Congressional Joint Committee on Taxation to approve the associated refund claim.

AEP and subsidiaries file income tax returns in various state and local jurisdictions. These taxing authorities routinely examine the tax returns, and AEP and subsidiaries are currently under examination in several state and local jurisdictions. The Registrants are no longer subject to state or local examinations by tax authorities for years before 2012. In addition, management is monitoring and continues to evaluate the potential impact of federal legislation and corresponding state conformity.
Federal Legislation

In March 2020, the CARES Act was signed into law. The CARES Act includes tax relief provisions including a 5-year NOL carryback from years 2018-2020. In the third quarter of 2020, AEP requested a $95 million refund of taxes paid in 2014 under the 5-year NOL carryback provision of the CARES Act. AEP carried back a NOL generated on the 2019 Federal income tax return at a 21% federal corporate income tax rate to the 2014 Federal income tax return at a 35% corporate income tax rate. As a result of the change in the corporate income tax rates between the two periods, AEP realized a tax benefit of $48 million primarily at the Generation & Marketing segment in 2020.

State Legislation

In April 2021, West Virginia enacted House Bill (H.B.) 2026. H.B. 2026 changes the state income tax apportionment formula from a ratio that includes property, payroll and sales to a single sales factor apportionment regime effective for tax years beginning on or after January 1, 2022. H.B. 2026 also eliminates the “throw out” rule related to sales of tangible personal property for sales factor apportionment calculation purposes and introduces a market-based sourcing for sales of services and intangible property. In the second quarter of 2021, AEP recorded $20 million in Income Tax Expense as a result of remeasuring West Virginia deferred taxes under the new apportionment methodology. The enacted legislation does not impact AEP Texas, PSO or SWEPCo.

In May 2021, Oklahoma enacted House Bill (H.B.) 2960. H.B. 2960 reduces the Oklahoma corporate income tax rate from 6% to 4%. In the second quarter of 2021, AEP recorded a $1 million Income Tax Benefit as a result of remeasuring Oklahoma deferred taxes at the lowered statutory tax rate of 4%. The enacted legislation does not impact APCo, I&M or OPCo.