Income Taxes

12 Months Ended

Dec. 31, 2023

Income Taxes

Income Taxes

Note 25. Income Taxes

The Company is a REIT pursuant to Internal Revenue Code Section 856. Qualification as a REIT depends on the Company’s ability to meet various requirements imposed by the Internal Revenue Code, which relate to its organizational structure, diversity of stock ownership and certain requirements with regard to the nature of its assets and the sources of its income. As a REIT, the Company generally must distribute annually dividends equal to at least 90% of its net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to earnings that are distributed. To the extent the Company satisfies this distribution requirement but distributes less than 100% of its net taxable income, it will be subject to U.S. federal income tax on its undistributed taxable income. In addition, the Company will be subject to a 4% nondeductible excise tax if the actual amount paid to stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. Even if the Company qualifies as a REIT, it may be subject to certain U.S. federal income and excise taxes and state and local taxes on its income and assets. If the Company fails to maintain its qualification as a REIT for any taxable year, it may be subject to material penalties as well as federal, state and local income tax on its taxable income at regular corporate rates and it would not be able to qualify as a REIT for the subsequent four taxable years. As of December 31, 2023 and 2022, the Company was in compliance with all REIT requirements.

Certain subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit the Company to participate in certain activities that would not be qualifying income if earned directly by the parent REIT, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Internal Revenue Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Internal Revenue Code. To the extent these criteria are met, the Company will continue to maintain our qualification as a REIT. The Company’s TRSs engage in various real estate - related operations, including originating and securitizing commercial mortgage loans, and investments in real property. Such TRSs are not consolidated for federal income tax purposes but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred income taxes is established for the portion of earnings recognized by the Company with respect to its interest in TRSs.

The table below presents the composition of income tax provision.

	Year Ended December 31,
(in thousands)	2023		2022		2021
Current
Federal income tax	$	1,605	$	6,878	$	13,423
State and local income tax		214		1,588		1,400
Net current tax provision	$	1,819	$	8,466	$	14,823
Deferred
Federal income tax		4,314		6,976		3,048
State and local income tax (benefit)		1,041		33		(3,012)
Net deferred tax provision	$	5,355	$	7,009	$	36
Total income tax provision	$	7,174	$	15,475	$	14,859

The table below is a reconciliation of federal income tax determined using the statutory federal tax rate to the reported income tax provision.

	Year Ended December 31,
(in thousands)	2023				2022
U.S. statutory tax	$	75,268	21.0	%	$	36,755	21.0	%
State and local income tax		929	0.3			(920)	(0.5)
Income attributable to REIT		(69,019)	(19.3)			(19,916)	(11.4)
Income attributable to non-controlling interests		(1,789)	(0.5)			(1,378)	(0.8)
Permanent items		863	0.2			(844)	(0.5)
Other		922	0.3			1,778	1.0
Effective income tax	$	7,174	2.0	%	$	15,475	8.8	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are presented net by tax jurisdiction and are reported in other assets and other liabilities, respectively.

The table below presents the tax effects of temporary differences on their respective net deferred tax assets and liabilities.

	Year Ended December 31,
(in thousands)	2023		2022
Deferred tax assets:
Net operating loss carryforwards	$	22,153	$	13,409
Accruals		6,593		7,369
Depreciation and amortization		2,913		933
Goodwill		17,647		2,064
Compensation		119		33
Other		45		155
Total deferred tax assets	$	49,470	$	23,963
Deferred tax liabilities:
Loan / servicing rights balance		50,844		45,680
Derivative instruments		56		48
Other taxable temporary difference		5,642		3,457
Unrealized gains		4,820		4,686
Total deferred tax liabilities	$	61,362	$	53,871
Valuation allowance		(21,085)		—
Net deferred tax liabilities	$	(32,977)	$	(29,908)

The Company has approximately $55.8 million of federal and $132.6 million of state net operating loss carryforwards that will begin to expire in 2024.

Additionally, as of December 31, 2023, the Company had federal net operating loss carryforwards of $40.6 million and capital loss carryforwards of $123.1 million obtained in the Broadmark Merger and the acquisition of Anworth that can be

used to offset future taxable ordinary income and capital gains, respectively. The net operating loss carryforwards can reduce the Company's REIT distribution requirements.

The Company recognizes deferred tax assets and liabilities for the future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under GAAP and their respective tax bases. The Company evaluates its deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical profitability and projections of future taxable income.

The provisions of ASC 740 require that carrying amounts of deferred tax assets be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of the acquisition of the Broadmark taxable REIT subsidiary, the Company has recorded net deferred tax assets of $21.1 million as of December 31, 2023. A full valuation allowance was recorded against these deferred tax assets as it is more likely than not that these assets will not be realized.

As of December 31, 2023, the Company concluded the positive evidence in favor of the recoverability of its remaining deferred tax assets outweighed the negative evidence and that it is more likely than not that its remaining deferred tax assets will be realized. The Company’s framework for assessing the recoverability of deferred tax assets requires it to weigh all available evidence, including the sustainability of recent profitability required to realize the deferred tax assets, the cumulative net income in its consolidated statements of income in recent years, the future reversals of existing taxable temporary differences, and the carryforward periods for any carryforwards of net operating losses.

The difference between the statutory rate of 21% and the effective income tax rate is primarily due to income attributable to the REIT that is offset by the dividends paid deduction.

As of December 31, 2023 and 2022, the Company had no uncertain tax positions recorded or disclosed in the financial statements. Additionally, it is the belief of management that the total amount of uncertain tax positions, if any, will not materially change over the next 12 months.

The Company and its TRSs are subject to taxation in U.S. federal and multiple state and local tax jurisdictions. Federal tax returns for 2020 and forward are subject to examination. In addition, tax years 2019 and forward remain open in certain state jurisdictions.