Judgment and the use of estimates are required in developing the provision for income taxes and reporting of tax-related assets and liabilities. The interpretation of tax laws and associated regulations involves uncertainty, since tax authorities may interpret the laws differently. The Companies are routinely audited by federal and state tax authorities. Ultimate resolution of income tax matters may result in favorable or unfavorable impacts to net income and cash flows, and adjustments to tax-related assets and liabilities could be material.

The Companies have accounted for the effects of the 2017 Tax Reform Act, although additional changes could occur as guidance is issued and finalized as described below.

In July 2020, the U.S. Department of Treasury issued final regulations providing guidance about the limitation on the deduction for business interest expenses under the 2017 Tax Reform Act. Under the 2017 Tax Reform Act, deductions for net interest expense are limited to 30% of adjusted taxable income, which has, until this point, been defined similarly to EBITDA (earnings before interest, taxes, depreciation and amortization). For tax years beginning after December 31, 2021, the calculation of adjusted taxable income is defined similarly to EBIT (earnings before interest and taxes). For consolidated groups such as Dominion Energy that have both regulated and nonregulated operations, these rules may result in a temporary disallowance of a portion of Dominion Energy’s interest deductions in the future, although any interest disallowed has an indefinite carryforward period.

In December 2020, federal legislation was enacted that, among other things, provides a two-year extension of the beginning construction deadline for, and delays the phase-down of, the solar energy investment tax credit as well as extending the deadlines and phase-down rules for certain other renewable tax credits. The legislation provides that offshore wind facilities are eligible for the investment tax credit if construction on those facilities begins before 2026 with no phase-out. In addition, the U.S. Department of Treasury and the IRS issued guidance for offshore wind that extended the continuity of construction safe harbor to 10 years, which significantly enhances the ability for these projects to qualify for renewable energy tax credits.

As indicated in Note 2, certain of the Companies’ operations, including accounting for income taxes, are subject to regulatory accounting treatment. For regulated operations, many of the changes in deferred taxes from the 2017 Tax Reform Act represent amounts probable of collection from or return to customers, and were recorded as either an increase to a regulatory asset or liability. See Note 13 for more information and current year developments.

Details of income tax expense for continuing operations including noncontrolling interests were as follows:

	Dominion Energy									Virginia Power
Year Ended December 31,	2021			2020			2019			2021			2020			2019
(millions)
Current:
Federal	$	(162	)	$	(314	)	$	(94	)	$	67		$	364		$	286
State		45			(81	)		58			(13	)		71			58
Total current expense (benefit)		(117	)		(395	)		(36	)		54			435			344
Deferred:
Federal
Taxes before operating loss carryforwards, investment tax credits and tax reform		151			12			168			145			(226	)		(128	)
Tax utilization expense of operating loss carryforwards		43			44			119			—			—			—
Investment tax credits		250			311			(51	)		(39	)		(27	)		(34	)
State		(19	)		72			(50	)		118			7			22
Total deferred expense (benefit)		425			439			186			224			(246	)		(140	)
Investment tax credit-gross deferral		121			42			62			121			42			62
Investment tax credit-amortization		(4	)		(3	)		(3	)		(2	)		(2	)		(2	)
Total income tax expense	$	425		$	83		$	209		$	397		$	229		$	264

In 2021, Dominion Energy’s current income taxes reflect a benefit from continuing operations as the income tax expense associated with the QPipe Group’s operations, including taxes on the gain, is reflected in discontinued operations. Dominion Energy’s income tax expense reflects the utilization of investment tax credit carryforwards to offset a portion of the federal tax gain on the sale.

In 2020, Dominion Energy’s current income taxes reflect a benefit from continuing operations as the income tax expense associated with gas transmission and storage operations, including taxes on the gain, is reflected in discontinued operations. Dominion Energy’s income tax expense reflects the utilization of investment tax credit carryforwards to offset a portion of the federal tax gain on the sale. In addition, an $18 million income tax benefit is reflected in common shareholders’ equity associated with state deferred taxes on assets and liabilities retained in connection with the GT&S Transaction.

In 2019, the Dominion Energy Gas Restructuring caused changes in tax status at certain of its subsidiaries. The impacts of the changes in tax status decreased deferred income tax expense from continuing operations by $48 million at Dominion Energy. In addition, Dominion Energy recognized a taxable gain resulting from the sale of a 25% noncontrolling interest in Cove Point. The direct tax effects of the transactions included a provision for current income taxes ($362 million) and an offsetting benefit for deferred income taxes ($147 million) and were charged to common shareholders’ equity. The utilization of $208 million federal tax credit carryforwards offsetting a portion of the federal tax liability from the transaction were also charged to common shareholders’ equity. In total, the taxes recorded in common shareholders’ equity resulting from this transaction were $215 million.

Income tax expense (benefit) reflected in discontinued operations is $188 million, $(204) million and $142 million for the years ended December 31, 2021, 2020 and 2019, respectively. 2021 income taxes include a $14 million benefit related to finalizing income tax returns on the GT&S Transaction and the absence of a $36 million benefit on non-deductible goodwill written off in connection with the sale of the Q-Pipe Group. The 2020 income tax expense reflects a charge of $81 million for the write-off of tax-related regulatory assets associated with the Atlantic Coast Pipeline Project and the absence of a $236 million benefit on non-deductible goodwill written off in connection with the GT&S Transaction.

For continuing operations including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to the Companies’ effective income tax rate as follows:

	Dominion Energy												Virginia Power
Year Ended December 31,	2021				2020				2019				2021				2020				2019
U.S. statutory rate		21.0		%		21.0		%		21.0		%		21.0		%		21.0		%		21.0		%
Increases (reductions) resulting from:
State taxes, net of federal benefit		2.6				2.0				1.5				4.6				4.8				4.5
Investment tax credits		(3.2	)			(9.6	)			(11.4	)			(3.0	)			(4.5	)			(2.9	)
Production tax credits		(0.4	)			(0.7	)			(2.1	)			(0.6	)			(0.7	)			(0.7	)
Valuation allowances		0.1				0.9				0.5				—				—				—
Reversal of excess deferred income taxes		(3.2	)			(5.4	)			(3.2	)			(2.1	)			(2.2	)			(3.1	)
State legislative change		(0.7	)			—				—				(0.7	)			—				—
Write-off of regulatory assets		—				—				21.7				—				—				—
Change in tax status		—				(1.7	)			(5.5	)			—				—				—
AFUDC—equity		(0.4	)			(0.2	)			(0.2	)			(0.5	)			—				—
Changes in state deferred taxes associated with assets held for sale		(0.3	)			(3.2	)			—				—				—				—
Absence of tax on noncontrolling interest		(0.1	)			3.8				(0.2	)			—				—				—
Settlements of uncertain tax positions		(1.2	)			—				—				—				—				—
Employee stock ownership plan deduction		(0.3	)			(0.9	)			(1.4	)			—				—				—
Nondeductible goodwill		—				—				1.8				—				—				—
Other, net		(0.2	)			(0.1	)			1.5				0.1				(0.1	)			(0.2	)
Effective tax rate		13.7		%		5.9		%		24.0		%		18.8		%		18.3		%		18.6		%

For the Companies’ rate-regulated entities, deferred taxes will reverse at the weighted average rate used to originate the deferred tax liability, which in some cases will be 35%. The Companies have recorded an estimate of excess deferred income tax amortization in 2021, and changes in estimates of amounts probable of collection from or return to customers. The reversal of these excess deferred income taxes will impact the effective tax rate, and rates charged to customers. See Note 13 for current year developments.

In December 2021, unrecognized tax benefits related to several state uncertain tax positions acquired in the SCANA Combination were effectively settled through negotiations with the taxing authority. Management believed it was reasonably possible these unrecognized tax benefits could decrease through settlement negotiations or payments during 2021, however no income tax benefits could be recognized unless or until the positions were effectively settled. Resolution of these uncertain tax positions decreased income tax expense by $38 million. In addition, the Companies’ effective tax rates reflect the benefit of a state legislative change enacted in April 2021 for tax years beginning January 1, 2022. Dominion Energy’s effective tax rate reflects a $21 million deferred tax benefit, inclusive of a $16 million deferred tax benefit at Virginia Power.

Dominion Energy’s 2020 effective tax rate reflects an income tax benefit of $45 million associated with the remeasurement of consolidated state deferred taxes with the classification of gas transmission and storage operations as held for sale. In addition, Dominion Energy’s effective tax rate reflects an income tax expense of $55 million attributable to the noncontrolling interest primarily associated with the impairment of non-wholly-owned nonregulated solar facilities held in partnerships discussed in Note 10.

In connection with the SCANA Combination, Dominion Energy committed to forgo, or limit, the recovery of certain income tax-related regulatory assets associated with the NND Project. Dominion Energy’s effective tax rate reflects deferred income tax expense of $194 million in satisfaction of this commitment. Dominion Energy’s effective tax rate also reflects the changes in consolidated state income taxes resulting from the SCANA Combination.

	Dominion Energy						Virginia Power
At December 31,	2021			2020			2021			2020
(millions)
Deferred income taxes:
Total deferred income tax assets	$	3,025		$	3,285		$	1,373		$	1,204
Total deferred income tax liabilities		9,397			9,069			4,286			3,832
Total net deferred income tax liabilities	$	6,372		$	5,784		$	2,913		$	2,628
Total deferred income taxes:
Plant and equipment, primarily depreciation method and basis differences	$	6,017		$	5,824		$	3,327		$	3,227
Excess deferred income taxes		(1,107	)		(1,142	)		(629	)		(656	)
Unrecovered NND Project costs		508			529			—			—
DESC rate refund		(113	)		(140	)		—			—
Toshiba Settlement		(189	)		(204	)		—			—
Nuclear decommissioning		1,114			991			324			303
Deferred state income taxes		857			702			420			305
Federal benefit of deferred state income taxes		(179	)		(147	)		(88	)		(64	)
Deferred fuel, purchased energy and gas costs		189			(28	)		126			(34	)
Pension benefits		362			239			(119	)		(105	)
Other postretirement benefits		73			(14	)		93			76
Loss and credit carryforwards		(1,571	)		(1,534	)		(537	)		(354	)
Valuation allowances		140			155			6			6
Partnership basis differences		398			593			—			—
Other		(127	)		(40	)		(10	)		(76	)
Total net deferred income tax liabilities	$	6,372		$	5,784		$	2,913		$	2,628
Deferred Investment Tax Credits – Regulated Operations		286			169			270			151
Total Deferred Taxes and Deferred Investment Tax Credits	$	6,658		$	5,953		$	3,183		$	2,779

At December 31, 2021, Dominion Energy had the following deductible loss and credit carryforwards:

	Deductible		Deferred		Valuation			Expiration
	Amount		Tax Asset		Allowance			Period
(millions)
Federal losses	$	965	$	203	$	—		2037
Federal investment credits	—			752	—			2036-2041
Federal production and other credits	—			63	—			2036-2041
State losses		4,583		243		(50	)	2022-2041
State minimum tax credits	—			214	—			No expiration
State investment and other credits	—			129		(90	)	2022-2031
Total	$	5,548	$	1,604	$	(140	)

At December 31, 2021, Virginia Power had the following deductible loss and credit carryforwards:

	Deductible		Deferred		Valuation			Expiration
	Amount		Tax Asset		Allowance			Period
(millions)
Federal losses	$	—	$	—	$	—
Federal investment credits	—			467	—			2036-2041
Federal production and other credits	—			62	—			2036-2041
State investment and other credits	—			8		(6	)	2024
Total	$	—	$	537	$	(6	)

A reconciliation of changes in the Companies’ unrecognized tax benefits follows:

	Dominion Energy											Virginia Power
	2021			2020			2019					2021		2020		2019
(millions)
Balance at January 1	$	167		$	175		$	44				$	—	$	—	$	2
Acquired unrecognized tax benefits		—			—			129		⁽¹	⁾		—		—		—
Increases-prior period positions		48			18			—					—		—		—
Decreases-prior period positions		(59	)		(19	)		—					—		—		—
Increases-current period positions		2			1			9					—		—		—
Settlements with tax authorities		(26	)		—			(7	)				—		—		(2	)
Expiration of statutes of limitations		(4	)		(8	)		—					—		—		—
Balance at December 31	$	128		$	167		$	175				$	-	$	—	$	-

Certain unrecognized tax benefits, or portions thereof, if recognized, would affect the effective tax rate. Changes in these unrecognized tax benefits may result from remeasurement of amounts expected to be realized, settlements with tax authorities and expiration of statutes of limitations. For Dominion Energy and its subsidiaries, these unrecognized tax benefits were $72 million, $140 million and $141 million at December 31, 2021, 2020 and 2019, respectively. In discontinued operations, these unrecognized tax benefits were $33 million at December 31, 2021. For Dominion Energy, the change in these unrecognized tax benefits decreased income tax expense by $34 million and $6 million in 2021 and 2020, respectively, and increased income tax expense by $3 million in 2019. For discontinued operations, the change in these unrecognized tax benefits increased income tax expense by $5 million in 2020 and decreased income tax expense by less than $1 million 2019. For Virginia Power, these unrecognized tax benefits were less than $1 million at December 31, 2019. For Virginia Power, the change in these unrecognized tax benefits decreased income tax expense by $2 million in 2019.

Dominion Energy participates in the IRS Compliance Assurance Process which provides the opportunity to resolve complex tax matters with the IRS before filing its federal income tax returns, thus achieving certainty for such tax return filing positions agreed to by the IRS. The IRS has completed its audit of tax years through 2019. The statute of limitations has not yet expired for years after 2017. Although Dominion Energy has not received a final letter indicating no changes to its taxable income for tax year 2020, no material adjustments are expected. The IRS examination of tax year 2021 is ongoing.

It is reasonably possible that settlement negotiations and expiration of statutes of limitations could result in a decrease in unrecognized tax benefits in 2022 by up to $23 million for Dominion Energy. If such changes were to occur, other than revisions of the accrual for interest on tax underpayments and overpayments, earnings could increase by up to $9 million for Dominion Energy. Otherwise, with regard to 2021 and prior years, the Companies cannot estimate the range of reasonably possible changes to unrecognized tax benefits that may occur in 2022.

For each of the major states in which Dominion Energy operates, the earliest tax year remaining open for examination is as follows:

The Companies are also obligated to report adjustments resulting from IRS settlements to state tax authorities. In addition, if Dominion Energy utilizes operating losses or tax credits generated in years for which the statute of limitations has expired, such amounts are generally subject to examination.