Note 14—Income Taxes

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets (“DTAs”) as of the end of each quarter, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the DTAs will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not required.

Our framework for assessing the recoverability of DTAs requires us to weigh all available evidence, including:

The sustainability of recent profitability required to realize our deferred tax assets;

The cumulative net income or losses in our Consolidated Statement of Operations in recent years;

Forecasts of future book and tax income;

Our access to capital; and

The carryforward periods for net operating losses, capital losses and tax credits.

Our consideration of evidence requires significant judgment regarding estimates and assumptions that are inherently uncertain, particularly about our future business structure and financial results. Risks to our forward-looking estimates include, but are not limited to, changes in market rates of return, additional competitors entering the marketplace (which would reduce nominal rates of return from competition for new borrowers), limits on access to investible capital that would limit new investments that could be made by the Company, changes in the law and the Company’s dependence on a small, specialized team of the External Manager for underwriting activities. Refer to our Annual Report on Form 10-K for the year ended December 31, 2018, for more information about the risks to our business.

At September 30, 2019, the Company maintained a full valuation allowance against all of its DTAs, including federal and state net operating loss carryforwards. This treatment reflects the Company’s assessment that, in considering all available evidence, it was not more likely than not at such reporting date that its DTAs would be realized. However, the Company believes there is more than a remote but less than likely chance that, within the next 12 months, the portion of DTAs for which a valuation allowance is maintained could materially change due to potential changes in the Company’s investment strategy and other factors. Should this occur, the release of a portion or all of the valuation allowance would result in the recognition of certain net DTAs and a decrease to income tax expense during the reporting period in which the release is recorded. However, the exact timing and amount of any potential valuation allowance release is based upon future circumstances, such as the level of profitability that the Company objectively expects to achieve, and therefore cannot be predicted at this time.