Income Taxes

6 Months Ended

Jun. 30, 2020

Income Taxes

Income Taxes

20. Income Taxes

Certain of our domestic subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.

Our TRSs engage in various real estate related operations, including special servicing of commercial real estate, originating and securitizing commercial mortgage loans, and investing in entities which engage in real estate-related operations. As of June 30, 2020 and December 31, 2019, approximately $1.0 billion and $1.6 billion, respectively, of assets were owned by TRS entities. Our TRSs are not consolidated for U.S. federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.

The following table is a reconciliation of our U.S. federal income tax (benefit) provision determined using our statutory federal tax rate to our reported income tax (benefit) provision for the three and six months ended June 30, 2020 and 2019 (dollars in thousands):

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2020				2019				2020				2019
Federal statutory tax rate	$	31,849	21.0	%	$	28,556	21.0	%	$	16,520	21.0	%	$	44,692	21.0	%
REIT and other non-taxable loss		(26,923)	(17.8)	%		(26,013)	(19.1)	%		(17,009)	(21.6)	%		(42,172)	(19.8)	%
State income taxes		1,619	1.1	%		666	0.5	%		(160)	(0.2)	%		660	0.3	%
Federal benefit of state tax deduction		(340)	(0.2)	%		(140)	(0.1)	%		34	—	%		(139)	(0.1)	%
Net operating loss carryback rate differential		(3,717)	(2.5)	%		—	—	%		(3,717)	(4.7)	%		—	—	%
Intra-entity transfer		(3,781)	(2.5)	%		—	—	%		(3,781)	(4.8)	%		—	—	%
Other		(5)	—	%		464	0.3	%		86	0.1	%		826	0.4	%
Effective tax rate	$	(1,298)	(0.9)	%	$	3,533	2.6	%	$	(8,027)	(10.2)	%	$	3,867	1.8	%

The Company has used the discrete tax approach in calculating the tax benefit for the three and six months ended June 30, 2020 due to the fact that a relatively small change in the Company’s projected pre-tax net income could result in a volatile effective tax rate. Under the discrete method, the Company determines its tax benefit based upon actual results as if the interim period was an annual period.

In response to the COVID-19 pandemic, the U.S. and many other governments have enacted, or are contemplating enacting, measures to provide aid and economic stimulus.  These measures include deferring the due dates of tax payments and other changes to their income and non-income-based tax laws.  The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws, and to allow companies to carry back tax net operating losses (“NOLs”) generated in 2018 to 2020 to the five preceding tax years. The Company plans to carry back its NOL generated this year to a year in which the federal tax rate was 35%, resulting in a tax benefit from the NOL carryback for the three and six months ended June 30, 2020. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.