Income Taxes

6 Months Ended

Jun. 30, 2022

Income Taxes

Income Taxes

4.    Income Taxes

Our effective income tax rate was 24.3% and 23.9% for the three and six months ended June 30, 2022, respectively, compared with 22.9% and 22.8% for the three and six months ended June 30, 2021, respectively.

The increase in our effective income tax rate when comparing the three and six months ended June 30, 2022 and 2021 was primarily driven by an increase in pre-tax income in 2022 resulting in a decreased rate benefit from federal tax credits. We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant.

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties. In February 2022, we acquired an additional noncontrolling interest in a limited liability company established to invest in and manage low-income housing properties. Total consideration for this investment is expected to be $253 million, comprised of a $183 million note payable discussed in Note 3, an initial cash payment of $28 million and $42 million of interest payments expected to be paid over the life of the investment. At the time of the investment, we increased our investments in unconsolidated entities in our Condensed Consolidated Balance Sheet by $211 million, representing the principal balance of the note and the initial cash investment. We support the operations of these entities in exchange for a pro rata share of the tax credits they generate. The low-income housing investments qualify for federal tax credits that we expect to realize through 2033 under Section 42 or Section 45D of the Internal Revenue Code.

We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities, within our Condensed Consolidated Statements of Operations. During the three and six months ended June 30, 2022, we recognized $17 million and $31 million, respectively, of net losses for these investments. We also recognized a reduction in our income tax expense for the three and six months ended June 30, 2022 of $25 million and $48 million, respectively, due to federal tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the three and six months ended June 30, 2022, we recognized interest expense of $4 million and $6 million, respectively, associated with our investments in low-income housing properties.

During the three and six months ended June 30, 2021, we recognized $12 million and $21 million, respectively, of net losses for these investments. We also recognized a reduction in our income tax expense for the three and six months ended June 30, 2021 of $16 million and $32 million, respectively, due to federal tax credits realized from these investments as well as the tax benefits from the pre-tax losses realized. In addition, during the three and six months ended June 30, 2021,

we recognized interest expense of $3 million and $5 million, respectively, associated with our investments in low-income housing properties. See Note 12 for additional information related to these unconsolidated variable interest entities.

Equity-Based Compensation — We recognized excess tax benefits related to the vesting or exercise of equity-based compensation awards resulting in reductions in income tax expense of $2 million and $12 million for the three and six months ended June 30, 2022, compared to $2 million and $11 million, for the comparable prior year periods.