9. Income Taxes

Prior to the closing of the Business Combination on March 17, 2015, ZGP and its subsidiaries were pass-through entities for U.S. income tax purposes and their earnings flowed through to the owners without being subject to entity level income taxes. Accordingly, no income tax (benefit) expense has been recorded for the period prior to the closing of the Business Combination other than that related to ZGP’s foreign subsidiaries, which are branches for U.S. income tax purposes but paid income taxes in their respective foreign jurisdictions.

Following the reorganization, while ZGP and its subsidiaries continue to operate as pass-through entities for U.S. income tax purposes not subject to entity level taxes, ZAIS is taxable as a corporation for U.S. tax purposes. Accordingly, the Company’s consolidated financial statements include U.S. federal, state and local income taxes on the ZAIS’ allocable share of the consolidated results of operations, as well as taxes payable to jurisdictions outside the U.S related to the foreign subsidiaries.

The Company recorded income tax expense of $5,000 for the three months ended March 31, 2016, related solely to foreign taxes. The Company recorded income tax (benefit) of $(902,000) for the three months ended and March 31, 2015, related to U.S. federal, state and local income taxes on the Company’s allocable share of the consolidated results of operations, as well as foreign taxes payable to jurisdictions outside the U.S. related to Company’s foreign subsidiaries.

The following is a reconciliation of the U.S. statutory federal income tax rate to the Company’s effective tax rate:

	Three Months Ended March 31,
	2016			2015

Income tax (benefit) expense at the U.S. federal statutory income tax rate		34.00	%		35.00	%

State and local income tax, net of federal benefit		4.49	%		1.38	%
Foreign tax		-0.08	%		5.33	%
Effect of permanent differences		-0.03	%		0.00	%
Income attributable to non-controlling interests in Consolidated Funds not subject to tax		3.90	%		0.00	%
Income attributable to non-controlling interests in ZGP not subject to tax		-12.22	%		-26.75	%
Valuation allowance		-30.15	%		0.00	%
Total		-0.09	%		14.96	%

The Company’s effective tax rate for the periods presented above includes a rate benefit attributable to the fact that the Company’s subsidiaries operate as limited liability companies and limited partnerships which are treated as pass-through entities for U.S. federal and state income tax purposes. Accordingly, the Company’s consolidated financial statements include U.S. federal, state and local income taxes on the Company’s allocable share of the consolidated results of operations. The tax liability or benefit related to the partnership income or loss not allocable to the Company rests with the equity holders owning such non-controlling interests in ZAIS subsidiaries. For the three months ended March 31, 2016, the net effective tax rate represents the taxes accrued related to the Company’s operations in jurisdictions outside the U.S. as a full valuation allowance has been established on the tax benefit related to U.S. federal, state and local income taxes on the Company’s allocable share of the consolidated results of operations. For the three months ended March 31, 2015, the net effective tax rate represents a tax benefit related to the Company’s operations in jurisdictions outside the U.S. as well as a tax benefit related to U.S. federal, state and local income taxes on the Company’s allocable share of the consolidated results of operations.

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and are reported in the accompanying consolidated statements of financial condition. These temporary differences result in taxable or deductible amounts in future years. Deferred tax assets are included in deferred tax assets on the accompanying consolidated statements of financial condition.

As of March 31, 2016, the Company had total deferred tax assets of $6,229,000 related to net operating losses and other temporary differences related to the Company’s allocable share of the consolidated results of operations. Additionally at March 31, 2016, the Company had deferred tax assets of $767,000 related to ZAIS’s net operating losses and development stage start-up expenses incurred during the period from its inception and prior to the closing of the Business Combination with ZGP. The Company has established a full valuation allowance on the deferred tax asset as of March 31, 2016.

As of March 31, 2015, the Company had total deferred tax assets of $569,000 related to net operating losses and other temporary differences related to the Company’s allocable share of the consolidated results of operations.

As of March 31, 2016, the Company has estimated federal and state income tax net operating loss carryforwards of $12,706,000 which will expire as follows:

2032	$	1,000
2033		83,000
2034		122,000
2035		7,388,000
2036		5,112,000
Total	$	12,706,000

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of March 31, 2016, the Company has determined that the most recent management business forecasts do not support the realization of net deferred tax assets recorded for the Company. The Company has recorded a book loss for the three months ended March 31, 2016 and it is anticipated that expenses will continue to exceed revenues in 2016. Although management intends to pursue various initiatives with potential to alter the operating loss trend, there is no specific plan that has been implemented at this point in time that will alter the negative earnings trend.

Accordingly, management continues to believe that it is not more likely than not that its deferred tax asset will be realized and the Company has continued to maintain the full valuation allowance against the deferred tax asset of as of March 31, 2016. The Company has recorded an additional $1,928,000 charge to our consolidated statements of comprehensive income (loss) relating to the net operating losses and other temporary differences related to the Company’s allocable share of the consolidated results of operations for the three months ended March 31, 2016. The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

The Company does not believe it has any significant uncertain tax positions. Accordingly, the Company did not record any adjustments or recognize interest expense for uncertain tax positions for the three months ended March 31, 2016 and March 31, 2015, respectively. In the future, if uncertain tax positions arise, interest and penalties will be accrued and included in the income tax (benefit) expense on the consolidated statements of comprehensive income (loss).