Main Street Capital Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

9 Months Ended

Sep. 30, 2023

DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME

Main Street currently pays regular monthly dividends to its stockholders and periodically pays supplemental dividends to its stockholders. Future dividends, if any, will be determined by its Board of Directors on a quarterly basis. Main Street paid regular monthly dividends of $0.23 per share, totaling $57.0 million, or $0.69 per share, for the three months ended September 30, 2023, and $164.9 million, or $2.04 per share, for the nine months ended September 30, 2023, compared to aggregate regular monthly dividends of $48.1 million, or $0.645 per share, for the three months ended September 30, 2022, and $141.2 million, or $1.935 per share, for the nine months ended September 30, 2022. Main Street also paid a supplemental dividend of $23.0 million, or $0.275 per share, during the three months ended September 30, 2023, and $55.3 million, or $0.675 per share, during the nine months ended September 30, 2023, compared to supplemental dividends paid of $7.6 million, or $0.10 per share, during the three months ended September 30, 2022, and $18.5 million, or $0.25 per share, during the nine months ended September 30, 2022.

MSCC has elected to be treated for U.S. federal income tax purposes as a RIC. MSCC’s taxable income includes the taxable income generated by MSCC and certain of its subsidiaries, including the Funds and Structured Subsidiaries,

which are treated as disregarded entities for tax purposes. As a RIC, MSCC generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that MSCC distributes to its stockholders. MSCC must generally distribute at least 90% of its “investment company taxable income” (which is generally its net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status (pass-through tax treatment for amounts distributed). As part of maintaining RIC status, undistributed taxable income (subject to a 4% non-deductible U.S. federal excise tax) pertaining to a given fiscal year may be distributed up to twelve months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (i) filing of the U.S. federal income tax return for the applicable fiscal year or (ii) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.

The determination of the tax attributes for Main Street’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate (plus a 3.8% Medicare surtax, if applicable) on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income and qualified dividends, but may also include either one or both of capital gains and return of capital.

Listed below is a reconciliation of “Net increase in net assets resulting from operations” to taxable income and to total distributions declared to common stockholders for the nine months ended September 30, 2023 and 2022.


	Nine Months Ended September 30,
	2023		2022
	(estimated, dollars in thousands)
Net increase in net assets resulting from operations	$	289,366	$	135,287
Book-tax difference from share-based compensation expense	(3,771)		(3,456)
Net unrealized (appreciation) depreciation	(167,070)		19,922
Income tax provision	23,353		17,477
Pre-tax book (income) loss not consolidated for tax purposes	31,454		(28,333)
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates	48,411		24,026
Estimated taxable income (1)	221,743		164,923
Taxable income earned in prior year and carried forward for distribution in current year	49,216		50,834
Taxable income earned prior to period end and carried forward for distribution next period	(68,340)		(71,128)
Dividend payable as of period end and paid in the following period	19,664		16,789
Total distributions accrued or paid to common stockholders	$	222,283	$	161,418

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(1)MSCC’s taxable income for each period is an estimate and will not be finally determined until the company files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate.

The Taxable Subsidiaries primarily hold certain equity investments for Main Street. The Taxable Subsidiaries permit Main Street to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes and to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with MSCC for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in Main Street’s consolidated financial statements as portfolio investments and recorded at fair value. The Taxable Subsidiaries are not consolidated with MSCC for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities, as a result of their ownership of certain portfolio investments. The taxable income, or loss, of the Taxable Subsidiaries may differ from their book income, or loss,

due to temporary book and tax timing differences and permanent differences. The Taxable Subsidiaries are each taxed at corporate income tax rates based on their taxable income. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the Taxable Subsidiaries are reflected in Main Street’s consolidated financial statements.

The income tax expense (benefit) for Main Street is generally composed of (i) deferred tax expense (benefit), which is primarily the result of the net activity relating to the portfolio investments held in the Taxable Subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation or depreciation and other temporary book tax differences, and (ii) current tax expense, which is primarily the result of current U.S. federal income and state taxes and excise taxes on Main Street’s estimated undistributed taxable income. The income tax expense, or benefit, and the related tax assets and liabilities generated by the Taxable Subsidiaries, if any, are reflected in Main Street’s Consolidated Statements of Operations. Main Street’s provision for income taxes was comprised of the following for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
	(dollars in thousands)
Current tax expense:
Federal	$	(5)	$	66	$	293	$	182
State	937		496		2,226		1,110
Excise	324		978		2,144		2,366
Total current tax expense	1,256		1,540		4,663		3,658
Deferred tax expense:
Federal	4,659		125		16,909		10,098
State	678		395		1,781		3,721
Total deferred tax expense	5,337		520		18,690		13,819

Total income tax provision	$	6,593	$	2,060	$	23,353	$	17,477

The net deferred tax liability at September 30, 2023 and December 31, 2022 was $66.5 million and $47.8 million, respectively, with the change primarily related to changes in net unrealized appreciation or depreciation, changes in loss carryforwards, and other temporary book-tax differences relating to portfolio investments held by the Taxable Subsidiaries. At September 30, 2023, for U.S. federal income tax purposes, the Taxable Subsidiaries had a net operating loss carryforward from prior years which, if unused, will expire in various taxable years from 2034 through 2037. Any net operating losses generated in 2018 and future periods are not subject to expiration and will carryforward indefinitely until utilized. Additionally, the Taxable Subsidiaries have interest expense limitation carryforwards which have an indefinite carryforward period.