Note 14—Income Taxes

Provision for Income Taxes

The Company was organized as a limited liability company that had elected to be taxed as a corporation for income tax purposes and, on January 1, 2019, converted into a corporation. All of our business activities, with the exception of our foreign investments, are conducted by entities included in our consolidated corporate federal income tax return.

The following table summarizes the components of our provision for income taxes for the years ended December 31, 2019 and December 31, 2018:


	For the year ended
	December 31,
(in thousands)	2019		2018
Current income tax expense:
Federal	$	─	$	─
State		(131)		(32)
Total current income tax expense		(131)		(32)
Deferred income tax benefit
Federal		46,353		─
State		14,260		─
Total deferred income tax benefit		60,613		─
Total provision benefit (expense) for income taxes	$	60,482	$	(32)

The following table reflects the effective income tax reconciliation from continuing operations for the years ended December 31, 2019 and December 31, 2018:


	For the year ended
	December 31,
(in thousands)	2019		2018
Income from continuing operations before income taxes	$	40,503	$	25,678

Income tax expense at federal statutory rate		(8,506)		(5,392)
Permanent differences:
Impact on taxes from entities not subject to tax		─		498
State income taxes, net of federal tax effect		504		(1,652)
Impact from other comprehensive income		3,593		4,594
State net operating loss adjustment		4,373		507
Other		(1,512)		(314)
Net decrease in the valuation allowance		62,030		1,727
Provision benefit (expense) for income taxes	$	60,482	$	(32)

DTAs, DTLs and Valuation Allowance

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 NOL carryforwards and tax credit carryforwards. At each reporting period, we evaluate the recoverability of our DTAs, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that, based on the weight of available evidence, 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 evidence is objectively verifiable. If negative evidence exists, positive evidence must be present to support a conclusion that a valuation allowance is not necessary.

Our framework for assessing whether DTAs will be realized requires us to weigh all available evidence, including:

our three-year cumulative income position;

the trend of pretax book income results;

the sustainability of recent profitability indicated by pretax book income from core business activities that was demonstrated in the past and would be reasonable to assume for the future (or, “Core Earnings”);

our forecast of pretax book income;

our access to capital;

macroeconomic risks to the economy and our business operations; and

the carryforward periods for NOLs, 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 of pretax book income include, but are not limited to, changes in market rates of return, additional competitors entering the marketplace (which could reduce rates of return due to 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. Given these risks, and while assumptions made by management are generally objectively verifiable as of a reporting date, our forward-looking estimates could materially differ from actual results.

At September 30, 2019, the Company assessed that the weight of available evidence was insufficient to conclude that it was more likely than not that all or a portion of its DTAs would be realized. This determination was partly attributable to the fact that, while the Company maintained a three-year cumulative income position at September 30, 2019, this measure included various one time, nonrecurring items that caused the Company not to heavily weight this analysis as positive evidence that it is more likely than not that the Company will remain profitable in the future. Further, the Company’s projection of pretax book income was not supported by a strong history of Core Earnings at the reporting date. As a result, the Company determined that, at September 30, 2019, the weight of negative evidence exceeded that of available positive evidence and maintained a full valuation allowance against its DTAs.

The Company’s projection for future pretax book income consequentially improved after September 30, 2019. During the fourth quarter of 2019, the Company received a $13.4 million partial prepayment of the Hunt note, and full repayment in January 2020. The amount of leverage used in connection with renewable energy investments also increased during this period as the UPB of draws from the Company’s revolving credit facility increased by $49.5 million to $94.5 million at December 31, 2019. These developments enabled the Company to redeploy capital into higher yielding renewable energy-related investments compared to that of the Hunt note, while also improving the scale of its investments and achieving enhanced returns increased through the use of leverage.

Given the noted improvements in the Company’s projection of pretax book income and other positive evidence, we assessed that, at December 31, 2019, it was more likely than not that a portion of our DTAs would be realized. In particular, while the Company’s three-year cumulative income position included various one-time, nonrecurring items, the Company reported pretax book income exclusive of nonrecurring items for the year ended December 31, 2019, and reported pretax book income trended positively in the last three years. Further, the Company’s analysis of Core Earnings substantially improved in the fourth quarter as the deployment of proceeds from the repayment of the Hunt note and improvement in leveraged returns from renewable energy investments increased the amount of pretax book income from core business activities that would be reasonable to assume for the future. Moreover, the Company’s Core Earnings measurement at December 31, 2019, was positive in six of the past seven quarters. Therefore, while the Company also considered macroeconomic risks to its business operations as a potential source of negative evidence in its analysis of whether its DTAs would be realized, the Company assessed that the preponderance of evidence available at December 31, 2019, was positive.

Based on the foregoing, the Company released a portion of its DTA valuation allowance in the fourth quarter of 2019 through the recognition of a $57.7 million net DTA. The amount released reflects the projected utilization of $210.2 million of federal NOLs based upon a federal corporate tax rate of 21.0% and a blended state tax rate (net of federal benefit) of 6.46% incorporating the Company’s forecast of pretax book income at December 31, 2019. This projection was made using objectively verifiable assumptions that reflected the Company’s historical experience and were otherwise deemed not to be subjective. However, realization of our DTAs is dependent on generating sufficient pretax book income in future periods. Therefore, although we believe it is more likely than not at December 31, 2019, that future income will be sufficient to allow us to realize the carrying value of net DTAs recognized at December 31, 2019, realization is not assured and future events could cause us to change our judgment. In this case, we could be required to adjust the DTA valuation allowance and recognize income tax benefit or expense.

The following table summarizes the carrying value of our DTAs, net of valuation allowance at December 31, 2019 and December 31, 2018:


	At		At
	December 31,		December 31,
(in thousands)	2019		2018
Deferred tax assets:
Net operating loss, tax credits and other tax carryforwards	$	122,917	$	123,902
Cancellation of subordinated debt		3,340		3,464
Other		1,715		(2,866)
Gross deferred tax assets		127,972		124,500
Valuation allowance		(65,373)		(124,500)
Total deferred tax assets, net of valuation allowance		62,599		─
Deferred tax liabilities:
Other, net		(4,888)		─
Total deferred tax liabilities		(4,888)		─
Deferred tax assets, net	$	57,711	$	─

The following table summarizes the change in the valuation allowance for the years ended December 31, 2019 and December 31, 2018:


	For the year ended
	December 31,
(in thousands)	2019			2018
Balance, January 1	$	124,500		$	139,987
Net reductions due to discontinued operations		2			(11,072)
Net reductions due to continuing operations		(59,129)	(1)		(1,727)
Cumulative change due to change in accounting principle		─			(2,688)
Balance, December 31	$	65,373		$	124,500

⁽¹⁾

This amount includes $2.9 million of valuation allowance release that is included in AOCI.

At December 31, 2019 and December 31, 2018, the Company had pre-tax federal NOLs of $374.9 million and $396.1 million, respectively, which are available to reduce future federal income taxes and begin to expire in 2028.

For the tax year ending December 31, 2019, the Company had income taxes receivable (net of current taxes payable) of $0.1 million reported as an “Other assets” on our Consolidated Balance Sheets.

Significant judgment is required in determining and evaluating income tax positions. The Company establishes additional provisions for income taxes when there are certain tax positions that could be challenged and that may not be supportable upon review by taxing authorities. The Company had no liabilities for uncertain tax positions at December 31, 2019 and December 31, 2018. The changes to tax positions that only affect timing are comprised of temporary differences that, if recognized, would adjust the amount of the NOL carryforwards which were subject to the Company’s valuation allowance in the period then recorded; therefore, a liability was not recorded for these uncertain tax positions. A reconciliation of the beginning and ending amount for uncertain tax positions, including amounts that only affect timing follows:


	For the year ended
	December 31,
(in thousands)	2019		2018
Balance, January 1	$	─	$	1,863
Net decreases for tax positions of prior years		─		─
Net decreases due to tax positions that only affect timing		─		(1,863)
Balance, December 31	$	─	$	─

The impact of the uncertain tax positions that only affect timing decreased to zero at December 31, 2018, as a result of the reversal of the Company’s bonus accrual due to the Disposition.

The Company is subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the tax years ended December 31, 2016 to December 31, 2019 and is currently under audit by the IRS for its December 31, 2016 federal income tax return.