ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) (In thousands of dollars, except per share amounts)
Years Ended December 31, 2024 2023 $ 120,430 $ 90,674
Computed Federal tax expense at statutory rate
Decrease in Federal tax expense related to the flow through benefit of repair deductions Amortization of deferred benefit from repair method changes
(107,853) (18,454) (13,745) (5,971)
(117,370) (18,454) (15,115) (8,324)
State income taxes, net of Federal tax benefit Amortization of excess deferred income taxes Net change in unrecognized tax benefit Valuation allowance for deferred tax assets
288
(4,796)
4,747
8,148
Other, net
(1,278)
(1,208)
Actual income tax benefit
$
(21,836) $ (66,445)
As of December 31, 2025, and 2024, a change in valuation allowance for state deferred tax assets in the amounts of $(14,758) and $(4,206), respectively, are included in state income taxes, net of federal tax benefit above.
The Company uses the flow-through method to account for the repairs tax deduction for qualifying utility infrastructure at its regulated Pennsylvania and New Jersey subsidiaries. The flow-through method of recording income tax benefits results in a reduction to current income tax expense and is included in utility customers’ rates. The Company’s regulated Pennsylvania subsidiaries are subject to a collar mechanism. Amounts recognized above or below the collar are required to be recorded as either a regulatory asset or liability, subject to disposition in the next base rate case. In April 2023, the Internal Revenue Service issued Revenue Procedure 2023-15 which provides a safe harbor method of accounting that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve natural gas transmission and distribution property must be capitalized for tax purposes. In the second quarter of 2023, based on the tax legislative guidance that was issued, the Company reevaluated the uncertain tax positions related to the Regulated Water segment and reclassified a portion of its historical income tax reserves as a regulatory liability until accounting treatment is determined in its next base rate case. In the first quarter of 2025, based on the rate order received by Aqua Pennsylvania, the Company released $22,575 of income tax reserve regulatory liability, while the remaining the tax benefit of $4,874 will be refunded to customers through base rates over a two-year period. In September 2024, the Pennsylvania Public Utility Commission issued a rate order to Peoples Natural Gas approving several tax related settlements. Accordingly, in December 2024, the Company filed an updated Tax Repairs surcredit calculation with the Public Utility Commission to reflect the updated catch-up adjustment that should be returned to customers effective January 1, 2025, with extension of the original 481(a) amortization period from 5 to 10 years. Beginning January 1, 2025, no state tax benefit is being returned to customers in the approved base rates, as the state NOLs cannot be utilized presently.
The following table provides the changes in the Company’s unrecognized tax benefits: 2025
2024
2023
Balance at January 1,
$
8,207 $ 7,898 $ 18,217
Impact of current year activity
(315) (122)
309
7,219
Effect of Pennsylvania tax rate change Decrease for prior year tax positions
- -
-
-
(17,538)
Balance at December 31,
$
7,770 $ 8,207 $ 7,898
53
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