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Income Taxes
 9 Months Ended
Sep. 30, 2022
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 2022 and 2021, 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, 2022
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
(0.8)%0.5 %2.6 %(6.2)%2.7 %0.7 %3.0 %(5.3)%
Tax Reform Excess ADIT Reversal
(9.7)%(2.0)%0.3 %(8.6)%(13.3)%(6.2)%(21.9)%(4.6)%
Production and Investment Tax Credits
(12.0)%(0.4)%— %— %— %— %(43.7)%(24.1)%
Flow Through
(0.3)%0.2 %0.3 %(0.7)%(1.5)%0.4 %0.4 %(1.3)%
AFUDC Equity
(1.4)%(1.2)%(1.9)%(0.4)%(0.6)%(0.8)%(0.4)%(0.2)%
Discrete Tax Adjustments
(0.2)%— %— %— %— %— %— %— %
Other
1.0 %0.2 %0.2 %— %(0.5)%0.2 %0.2 %(0.2)%
Effective Income Tax Rate(2.4)%18.3 %22.5 %5.1 %7.8 %15.3 %(41.4)%(14.7)%
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 Adjustments0.2 %— %— %— %— %— %— %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 %
Nine Months Ended September 30, 2022
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
0.7 %0.5 %2.7 %(0.8)%1.3 %0.8 %3.2 %(1.5)%
Tax Reform Excess ADIT Reversal
(7.8)%(2.0)%0.3 %(10.3)%(15.7)%(7.3)%(20.8)%(4.8)%
Production and Investment Tax Credits
(8.7)%(0.4)%— %— %(1.4)%— %(39.5)%(22.5)%
Flow Through
— %0.2 %0.3 %0.2 %(1.6)%0.5 %0.3 %(0.8)%
AFUDC Equity
(1.1)%(1.2)%(1.9)%(0.8)%(0.8)%(0.7)%(0.4)%(0.4)%
Discrete Tax Adjustments
(0.2)%— %— %(1.8)%— %— %— %0.3 %
Other
0.6 %0.1 %0.1 %— %0.2 %0.1 %0.2 %— %
Effective Income Tax Rate4.5 %18.2 %22.5 %7.5 %3.0 %14.4 %(36.0)%(8.7)%
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 Adjustments1.1 %— %— %— %— %(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 %

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 net operating loss carryback to 2015 that originated in the 2017 return. As of September 30, 2022, the IRS has accepted the 2014-2016 amended tax returns as filed which completes the IRS audit of these tax years. Additionally, AEP has received and agreed to two proposed adjustments on the 2017 tax return, which were immaterial. AEP has agreed to extend the statute of limitations on the 2017 and 2018 tax return to December 31, 2023 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. Generally, the statutes of limitations have expired for tax years prior to 2017. In addition, management is monitoring and continues to evaluate the potential impact of federal legislation and corresponding state conformity.
Federal Legislation

On August 16, 2022, President Biden signed H.R. 5376 into law, commonly known as the Inflation Reduction Act of 2022 or IRA. Most notably this budget reconciliation legislation creates a 15% minimum tax on adjusted financial statement income (Corporate Alternative Minimum Tax or CAMT), extends and increases the value of PTCs and ITCs, adds a nuclear and clean hydrogen PTC, an energy storage ITC and allows the sale or transfer of tax credits to third parties for cash. With the exception of PTCs and ITCs, this legislation is prospective and has no material impact on the current period financial statements. As significant guidance from Treasury and the IRS is expected on the tax provisions in the IRA, AEP will continue to monitor any issued guidance and evaluate the impact on future net income, cash flows and financial condition.