INCOME TAXES

Certain activities of the Company are conducted through a TRS, FOAC, which is therefore subject to tax as a corporation. Pursuant to ASC 740, deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized.

Impacts of Tax Reform:

On December 22, 2017, the Tax Cut and Jobs Act (H.R. 1) (the "Tax Act") was signed into law. The Tax Act contains significant changes to corporate taxation, including the reduction of the corporate income tax rate to 21%. We have substantially completed our assessment of the effects of the Tax Act and we are able to determine reasonable estimates for the impacts of the items specified below. We continue to monitor and analyze the application of the “tax act” to our business and continue to assess our provision for income taxes as future guidance is issued.

The key aspects of the Tax Act on our financial statements for the year ended December 31, 2017 were; (1) The federal statutory tax rate was reduced to 21%. In prior years, the Company valued its deferred tax asset at 34%. The related re-measurement of the deferred tax asset resulted in a reduction of $364,000. This amount is fully offset by a corresponding reduction to the valuation allowance as discussed in the paragraph below, (2) Taxpayers that have existing AMT credit from previously paid AMT tax will be allowed to offset their regular tax liability for any future taxable year. Additionally, the AMT credit will be refundable for any taxable year beginning after December 31, 2017 and before January 1, 2022 in an amount equal to 50% of the excess of the AMT credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. In tax year 2021, 100% of any remaining excess AMT credit will be refunded. As a result, the valuation allowance attributable to prior years AMT credit in the amount of $12,000 is released and AMT credit accrued for the current year is recognized in the deferred tax asset.

The following table reconciles the Company’s TRS GAAP net income (loss) to taxable income (in thousands):



	Year Ended December 31,
	2017		2016		2015
	(in thousands)		(in thousands)		(in thousands)
GAAP consolidated net income (loss) attributable to Five Oaks Investment Corp	4,707		(7,990	)	450
GAAP net loss (income) from REIT operations	(4,645	)	6,654		(1,826	)
GAAP net income (loss) of taxable subsidiary	62		(1,336	)	(1,376	)
Capitalized transaction fees	(41	)	(41	)	(41	)
Unrealized gain (loss)	639		1,964		2,041
Deferred income	19		204		—
Tax income (loss) of taxable subsidiary before utilization of net operating losses	679		791		624
Utilizations of net operating losses	(679	)	(791	)	(624	)
Net tax income of taxable subsidiaries	—		—		—

The following is a reconciliation of the statutory federal and state tax rates to the effective rates, for the years ended December 31, 2017, 2016 and 2015:



	Year Ended December 31,
	2017		2016		2015
	(in thousands)		(in thousands)		(in thousands)
U.S. Federal Statutory Income Tax	1,601		(2,717	)	153
State Taxes	1		(53	)	(54	)
REIT Income not subject to federal income tax	(1,579	)	2,263		(621	)
Tax affect of U.S. corporate rate change	364		—		—
Valuation Allowance	(406	)	507		522
Total income tax provision (benefit)	(19	)	—		—
Effective income tax rate	0.41	%	—	%	—	%

The TRS has a deferred tax asset (liability), comprised of the following (in thousands):



	As of December 31, 2017		As of December 31, 2016
Accumulated net operating losses of TRS	337		758
Unrealized gain (loss)	251		127
Capitalized transaction costs	122		196
Deferred income	57		77
AMT Credit	19		12
Deferred tax asset	786		1,170
Valuation allowance	(767	)	(1,170	)
Net non-current deferred tax asset (liability)	19		—

We have provided a valuation allowance against our deferred tax asset, that results in no deferred asset at December 31, 2017, and 2016 except for refundable AMT credits as discussed above. The Company recorded a 100% valuation allowance related to the TRS net deferred tax asset because we believe it is more likely than not that the deferred tax asset will not be fully realized. The valuation allowance decreased by $403,000 as a result of the decrease in statutory tax rates as discussed above. The realization of the deferred tax asset associated with net operating losses is dependent on projections of future taxable income, for which there is uncertainty when considering historic results and the nature of the business. Accordingly, no provision or benefit (current or deferred tax expense) for income taxes is reflected in the accompanying financial statements. At December 31, 2017, and 2016 the TRS had net operating loss carryforwards for federal income tax purposes of $1.3 million and $2.0 million, which are available to offset future taxable income and begin expiring in 2034. For state purposes, the Company is in the process of determining filing requirements, but anticipates materially all prior losses to be recognized.

The Company files income tax returns with the U.S. federal government and various states. The Company is subject to examinations for the prior three years. The Company has assessed its tax positions for all open years and concluded there are no material uncertain tax positions.

The Company declared and paid in the fourth quarter of 2016 a deficiency dividend relating to a determination of an inability to offset certain net gains on hedging transactions in 2013 against net capital losses on the sale of certain mortgage-backed securities. In connection with this declaration, the Company provisioned an amount of $1.86 million in 2016 for interest charges expected to be paid to the IRS following the payment of the dividend. On March 8, 2017, the Company paid an amount of $2.01 million to the IRS for interest charges related to the 2016 fourth quarter deficiency dividend. The amount paid exceeded the provision of $1.86 million taken in 2016 due to timing of the payment and accordingly the Company recorded additional interest expense of $0.15 million, which is included in "Other interest expense" in the Company's consolidated statements of operations. The first quarter 2017 payment of $2.01 million is included in "cash paid for interest" in the Company's consolidated statements of cash flows.