PINNACLE WEST CAPITAL CORPPNW
PINNACLE WEST CAPITAL CORP Income Taxes Disclosure
Income Taxes
Certain assets and liabilities are reported differently for income tax purposes than they are for financial statement purposes. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using currently enacted income tax rates.
APS has recorded regulatory assets and regulatory liabilities related to income taxes on its Consolidated Balance Sheets in accordance with accounting guidance for regulated operations. The regulatory assets are for certain temporary differences, primarily the allowance for equity funds used during construction, ITC basis adjustment and tax expense of Medicare subsidy. The regulatory liabilities primarily relate to the change in income tax rates and deferred taxes resulting from ITCs.
In accordance with regulatory requirements, APS ITCs are deferred and are amortized over the life of the related property with such amortization applied as a credit to reduce current income tax expense in the Statements of Income.
On January 30, 2024, Pinnacle West entered into a tax credit transfer agreement to purchase from Ameresco $23 million of investment tax credits from the BCE Los Alamitos project for $21 million. While the $23 million reduced tax payments, the $21 million paid to Ameresco is not included in the income taxes paid table below. See Note 22 for more information about the BCE Sale.
The Company claimed a $33.4 million benefit for the Nuclear PTC on its 2024 tax return using a revenue requirement methodology to determine its gross receipts from nuclear sales. In the continued absence of IRS guidance regarding the definition of gross receipts from nuclear sales, management intends to utilize this same methodology to claim a 2025 credit of $39.6 million. These benefits include the five times multiplier for complying with IRS prevailing wage rules. However, due to the continued lack of IRS guidance, management believes that there remains uncertainty as to whether the IRS will ultimately agree with the Company’s gross receipts methodology. As a result, the entire amount of the 2024 and 2025 benefits is recorded as uncertain tax positions and the Company continues to not recognize any income tax benefits related to the Nuclear PTC.
Net income associated with the Captive and Palo Verde sale leaseback VIEs is not subject to tax. As a result, there is no income tax expense associated with the VIEs recorded on the Pinnacle West Consolidated and APS Consolidated Statements of Income. See Note 12 for additional details related to Palo Verde sale leaseback VIEs.
The components of income tax expense are as follows (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | ||||||||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Current: | |||||||||||||||||||||||||||||||||||
| Federal | $ | 87,913 | $ | 137,342 | $ | 21,272 | $ | 94,207 | $ | 165,653 | $ | 26,405 | |||||||||||||||||||||||
| State | 10,892 | 2,392 | 2,854 | 31,424 | 26,054 | 1,027 | |||||||||||||||||||||||||||||
| Total current | 98,805 | 139,734 | 24,126 | 125,631 | 191,707 | 27,432 | |||||||||||||||||||||||||||||
| Deferred: | |||||||||||||||||||||||||||||||||||
| Federal | (11,073) | (53,228) | 37,273 | (2,902) | (69,075) | 44,922 | |||||||||||||||||||||||||||||
| State | 18,994 | 24,023 | 15,513 | 3,190 | 4,361 | 21,830 | |||||||||||||||||||||||||||||
| Total deferred | 7,921 | (29,205) | 52,786 | 288 | (64,714) | 66,752 | |||||||||||||||||||||||||||||
Income tax expense | 106,726 | 110,529 | 76,912 | 125,919 | 126,993 | 94,184 | |||||||||||||||||||||||||||||
The following table compares Pinnacle West Consolidated pretax income at the 21% statutory federal income tax rate to income tax expense (dollars in thousands) and effective tax rates:
| Pinnacle West Consolidated | |||||||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| Income before income taxes (a) | $ | 738,369 | $ | 736,559 | $ | 595,693 | |||||||||||||||||||||||||||||
| Federal income tax expense at statutory rate | 155,057 | 21.00 | % | 154,677 | 21.00 | % | 125,095 | 21.00 | % | ||||||||||||||||||||||||||
| State income tax net of federal income tax benefit (b) | 23,610 | 3.20 | % | 23,735 | 3.22 | % | 17,832 | 2.99 | % | ||||||||||||||||||||||||||
| Changes in Valuation Allowance | — | — | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Nontaxable or Nondeductible Items | |||||||||||||||||||||||||||||||||||
| Share based compensation | (4,062) | (0.55) | % | (421) | (0.06) | % | 1,346 | 0.23 | % | ||||||||||||||||||||||||||
Palo Verde VIE noncontrolling interest (Note 12) | (3,173) | (0.43) | % | (3,617) | (0.49) | % | (3,617) | (0.61) | % | ||||||||||||||||||||||||||
| Other Nontaxable or Nondeductible Items | 5,896 | 0.80 | % | 3,667 | 0.50 | % | 2,405 | 0.40 | % | ||||||||||||||||||||||||||
| Effect of changes in tax laws or rates enacted in the current period | — | — | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Tax Credits | |||||||||||||||||||||||||||||||||||
| Solar or Wind Production Tax Credit | (14,698) | (1.99) | % | (15,206) | (2.07) | % | (8,441) | (1.42) | % | ||||||||||||||||||||||||||
| Other Federal Income Tax Credits | (19) | — | % | (242) | (0.03) | % | (650) | (0.11) | % | ||||||||||||||||||||||||||
| Investment credit amortization – deferral method | (12,625) | (1.71) | % | (9,425) | (1.28) | % | (9,495) | (1.59) | % | ||||||||||||||||||||||||||
| Changes in Unrecognized Tax Benefits | 1,523 | 0.21 | % | (28) | — | % | (1,961) | (0.33) | % | ||||||||||||||||||||||||||
| Effects of Utility Ratemaking | |||||||||||||||||||||||||||||||||||
| Excess deferred income taxes — Tax Cuts and Jobs Act | (36,558) | (4.95) | % | (36,559) | (4.96) | % | (36,558) | (6.14) | % | ||||||||||||||||||||||||||
Allowance for equity funds used during construction (Note 1) | (7,005) | (0.95) | % | (2,545) | (0.35) | % | (5,964) | (1.00) | % | ||||||||||||||||||||||||||
| Other regulatory amortization | (2,758) | (0.38) | % | (1,796) | (0.24) | % | (1,828) | (0.31) | % | ||||||||||||||||||||||||||
| Other Adjustments | 1,538 | 0.20 | % | (1,711) | (0.23) | % | (1,252) | (0.20) | % | ||||||||||||||||||||||||||
Income tax expense | $ | 106,726 | 14.45 | % | $ | 110,529 | 15.01 | % | $ | 76,912 | 12.91 | % | |||||||||||||||||||||||
(a) Income before income taxes is from continuing operations and is entirely domestic.
(b) The State of Arizona makes up the majority (greater than 50 percent) of the effect of the state and local income tax category.
The following table compares APS Consolidated pretax income at the 21% statutory federal income tax rate to income tax expense (dollars in thousands) and effective tax rates:
| APS Consolidated | |||||||||||||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| Income before income taxes (a) | $ | 808,346 | $ | 786,142 | $ | 658,745 | |||||||||||||||||||||||||||||
| Federal income tax expense at statutory rate | 169,753 | 21.00 | % | 165,090 | 21.00 | % | 138,337 | 21.00 | % | ||||||||||||||||||||||||||
| State income tax net of federal income tax benefit (b) | 27,345 | 3.38 | % | 26,824 | 3.41 | % | 21,453 | 3.26 | % | ||||||||||||||||||||||||||
| Changes in Valuation Allowance | — | — | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Nontaxable or Nondeductible Items | |||||||||||||||||||||||||||||||||||
| Share based compensation | (2,482) | (0.31) | % | 23 | — | % | 997 | 0.15 | % | ||||||||||||||||||||||||||
Palo Verde VIE noncontrolling interest (Note 12) | (3,173) | (0.39) | % | (3,617) | (0.46) | % | (3,617) | (0.55) | % | ||||||||||||||||||||||||||
| Other Nontaxable or Nondeductible Items | 1,727 | 0.21 | % | 694 | 0.09 | % | 263 | 0.04 | % | ||||||||||||||||||||||||||
| Effect of changes in tax laws or rates enacted in the current period | — | — | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Tax Credits | |||||||||||||||||||||||||||||||||||
| Solar or Wind Production Tax Credit | (11,254) | (1.39) | % | (12,110) | (1.54) | % | (5,460) | (0.83) | % | ||||||||||||||||||||||||||
| Other Federal Income Tax Credits | (19) | — | % | (242) | (0.03) | % | (650) | (0.10) | % | ||||||||||||||||||||||||||
| Investment credit amortization – deferral method | (12,625) | (1.56) | % | (9,425) | (1.20) | % | (9,495) | (1.44) | % | ||||||||||||||||||||||||||
| Changes in Unrecognized Tax Benefits | 1,483 | 0.18 | % | (107) | (0.01) | % | (1,946) | (0.30) | % | ||||||||||||||||||||||||||
| Effects of Utility Ratemaking | |||||||||||||||||||||||||||||||||||
| Excess deferred income taxes — Tax Cuts and Jobs Act | (36,558) | (4.52) | % | (36,559) | (4.65) | % | (36,558) | (5.55) | % | ||||||||||||||||||||||||||
Allowance for equity funds used during construction (Note 1) | (7,005) | (0.87) | % | (2,545) | (0.32) | % | (5,964) | (0.91) | % | ||||||||||||||||||||||||||
| Other regulatory amortization | (2,758) | (0.34) | % | (1,796) | (0.23) | % | (1,828) | (0.28) | % | ||||||||||||||||||||||||||
| Other Adjustments | 1,485 | 0.19 | % | 763 | 0.09 | % | (1,348) | (0.19) | % | ||||||||||||||||||||||||||
Income tax expense | $ | 125,919 | 15.58 | % | $ | 126,993 | 16.15 | % | $ | 94,184 | 14.30 | % | |||||||||||||||||||||||
(a) Income before income taxes is from continuing operations and is entirely domestic.
(b) The State of Arizona makes up the majority (greater than 50 percent) of the effect of the state and local income tax category.
The following table presents the income taxes paid for Pinnacle West and APS on a retrospective basis (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | ||||||||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Federal | $ | 20,894 | $ | 112,870 | $ | 8,609 | $ | 30,207 | $ | 156,112 | $ | 21,438 | |||||||||||||||||||||||
| State | 1,860 | 128 | 179 | 23,431 | 22,901 | 296 | |||||||||||||||||||||||||||||
| Total | $ | 22,754 | $ | 112,998 | $ | 8,788 | $ | 53,638 | $ | 179,013 | $ | 21,734 | |||||||||||||||||||||||
State income taxes paid (net of refunds) exceed 5 percent of total income taxes paid (net of refunds) in the following jurisdictions (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | |||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Arizona | $ | 2,000 | $ | — | (a) | $ | — | (a) | $ | 23,423 | $ | 22,788 | $ | — | (a) | |||||||||||||||||||||||
(a) Jurisdiction below the threshold for the period presented.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits, excluding interest and penalties, at the beginning and end of the year that are included in accrued taxes and unrecognized tax benefits (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | ||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Total unrecognized tax benefits, January 1 | $ | 44,349 | $ | 44,274 | $ | 43,097 | $ | 44,349 | $ | 44,274 | $ | 43,097 | |||||||||||||||||||||||
| Additions for tax positions of the current year | 81,286 | 1,271 | 1,473 | 81,286 | 1,271 | 1,473 | |||||||||||||||||||||||||||||
| Additions for tax positions of prior years | 2,818 | 2,031 | 419 | 2,818 | 2,031 | 419 | |||||||||||||||||||||||||||||
| Reductions for tax positions of prior years for: | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
| Changes in judgment | (2,044) | (2,043) | 661 | (2,044) | (2,043) | 661 | |||||||||||||||||||||||||||||
| Settlements with taxing authorities | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Lapses of applicable statute of limitations | (970) | (1,184) | (1,376) | (970) | (1,184) | (1,376) | |||||||||||||||||||||||||||||
| Total unrecognized tax benefits, December 31 | $ | 125,439 | $ | 44,349 | $ | 44,274 | $ | 125,439 | $ | 44,349 | $ | 44,274 | |||||||||||||||||||||||
Included in the balances of unrecognized tax benefits are the following tax positions that, if recognized, would decrease our effective tax rate (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | ||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Tax positions, that if recognized, would decrease our effective tax rate | $ | 103,785 | $ | 27,899 | $ | 28,762 | $ | 103,785 | $ | 27,899 | $ | 28,762 | |||||||||||||||||||||||
As of December 31, 2025, the tax year ended December 31, 2022 and all subsequent tax years remain subject to examination by the IRS. With a few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 2021.
We reflect interest and penalties, if any, on unrecognized tax benefits in the Pinnacle West Consolidated and APS Consolidated Statements of Income as income tax expense. The amount of interest expense or benefit recognized related to unrecognized tax benefits are as follows (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | ||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||
Unrecognized tax benefit interest expense recognized | $ | 3,610 | $ | 2,743 | $ | 452 | $ | 3,610 | $ | 2,743 | $ | 452 | |||||||||||||||||||||||
Following are the total amounts of accrued liabilities for interest recognized related to unrecognized benefits that could reverse and decrease our effective tax rate to the extent matters are settled favorably (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | ||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Unrecognized tax benefit interest accrued | $ | 7,986 | $ | 4,376 | $ | 1,633 | $ | 7,986 | $ | 4,376 | $ | 1,633 | |||||||||||||||||||||||
As of December 31, 2025, we have recognized approximately $2.8 million of interest expense to be paid on the underpayment of income taxes for certain adjustments that we have filed, or will file, with the IRS.
The components of the net deferred income tax liability were as follows (dollars in thousands):
| Pinnacle West Consolidated | APS Consolidated | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| DEFERRED TAX ASSETS | |||||||||||||||||||||||
| Risk management activities | $ | 8,422 | $ | 14,539 | $ | 8,422 | $ | 14,539 | |||||||||||||||
| Regulatory liabilities: | |||||||||||||||||||||||
| Excess deferred income taxes — Tax Cuts and Jobs Act | 259,000 | 271,004 | 259,000 | 271,004 | |||||||||||||||||||
| Asset retirement obligation and removal costs | 66,031 | 81,308 | 66,031 | 81,308 | |||||||||||||||||||
| Unamortized investment tax credits | 81,949 | 66,327 | 81,949 | 66,327 | |||||||||||||||||||
| Other postretirement benefits | 57,833 | 58,862 | 57,833 | 58,862 | |||||||||||||||||||
| Other | 50,611 | 47,671 | 50,611 | 47,671 | |||||||||||||||||||
| Operating lease liabilities | 923,774 | 400,771 | 923,479 | 400,442 | |||||||||||||||||||
| Pension liabilities | 46,613 | 39,070 | 43,422 | 36,100 | |||||||||||||||||||
| Coal reclamation liabilities | 39,450 | 42,391 | 39,450 | 42,391 | |||||||||||||||||||
| Renewable energy incentives | 11,908 | 14,571 | 11,908 | 14,571 | |||||||||||||||||||
| Credit and loss carryforwards | — | 7,682 | — | — | |||||||||||||||||||
| Employee benefit liabilities | 56,447 | 57,853 | 55,243 | 56,561 | |||||||||||||||||||
| Other | 49,098 | 44,412 | 49,098 | 44,412 | |||||||||||||||||||
| Total deferred tax assets | 1,651,136 | 1,146,461 | 1,646,446 | 1,134,188 | |||||||||||||||||||
| DEFERRED TAX LIABILITIES | |||||||||||||||||||||||
| Plant-related | (2,595,668) | (2,562,990) | (2,595,668) | (2,562,990) | |||||||||||||||||||
| Risk management activities | (2,072) | (4,089) | (2,072) | (4,089) | |||||||||||||||||||
| Pension and other postretirement assets | (97,557) | (83,401) | (96,988) | (82,925) | |||||||||||||||||||
| Other special use funds | (58,175) | (55,146) | (58,175) | (55,146) | |||||||||||||||||||
| Operating lease right-of-use assets | (923,774) | (400,771) | (923,479) | (400,443) | |||||||||||||||||||
| Regulatory assets: | |||||||||||||||||||||||
| Allowance for equity funds used during construction | (50,402) | (47,694) | (50,402) | (47,694) | |||||||||||||||||||
| Deferred fuel and purchased power | (45,504) | (84,393) | (45,504) | (84,393) | |||||||||||||||||||
| Pension benefits | (178,736) | (185,641) | (178,736) | (185,641) | |||||||||||||||||||
| Ocotillo deferral | (24,703) | (28,372) | (24,703) | (28,372) | |||||||||||||||||||
| SCR deferral | (19,080) | (20,548) | (19,080) | (20,548) | |||||||||||||||||||
| Retired power plant costs | (13,157) | (16,904) | (13,157) | (16,904) | |||||||||||||||||||
| Other | (58,822) | (57,602) | (58,822) | (57,602) | |||||||||||||||||||
| Other | (54,418) | (43,383) | (7,425) | (7,378) | |||||||||||||||||||
| Total deferred tax liabilities | (4,122,068) | (3,590,934) | (4,074,211) | (3,554,125) | |||||||||||||||||||
| Deferred income taxes — net | $ | (2,470,932) | $ | (2,444,473) | $ | (2,427,765) | $ | (2,419,937) | |||||||||||||||
As of December 31, 2025, Pinnacle West consolidated deferred tax assets for credit and loss carryforwards relate to federal credit carryforwards of $27.9 million. Pinnacle West consolidated credit and loss carryforwards amount above has been reduced by $27.9 million of unrecognized tax benefits.
As of December 31, 2025, APS consolidated deferred tax assets for credit and loss carryforwards relate to federal credit carryforwards of $12.4 million. APS consolidated credit and loss carryforwards amount above has been reduced by $12.4 million of unrecognized tax benefits.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 25, 2026 | Showing above |
| 2024 | Feb 25, 2025 | |
| 2023 | Feb 27, 2024 | |
| 2022 | Feb 27, 2023 | |
| 2021 | Feb 25, 2022 | |
| 2020 | Feb 24, 2021 | |
| 2019 | Feb 21, 2020 | |
| 2018 | Feb 22, 2019 | |
| 2017 | Feb 23, 2018 | |
| 2016 | Feb 24, 2017 | |
| 2015 | Feb 19, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.