Note 15 – Income Taxes

The Company elected to be taxed as a REIT under Code Sections 856 through 860 beginning with its short taxable year ended December 31, 2013. As a REIT, the Company generally will not be subject to U.S. federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold, income it may generate and its stockholder composition. It is the Company’s policy to distribute all or substantially all of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company can elect to distribute such shortfall within the next year as permitted by the Code.

Effective January 1, 2014, CHMI Solutions elected to be taxed as a corporation for U.S. federal income tax purposes; prior to this date, CHMI Solutions was a disregarded entity for U.S. federal income tax purposes. CHMI Solutions has jointly elected with the Company, the ultimate beneficial owner of CHMI Solutions, to be treated as a TRS of the Company, and all activities conducted through CHMI Solutions and its wholly-owned subsidiary Aurora, are subject to federal and state income taxes. CHMI Solutions files a consolidated tax return with Aurora and is fully taxed as a U.S. C-Corporation.

The state and local tax jurisdictions for which the Company is subject to tax filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. CHMI Solutions and Aurora are subject to U.S. federal, state and local income taxes.

The components of the Company’s income tax expense (benefit) are as follows for the periods indicated below (dollars in thousands):

	Nine Months Ended September 30,
	2019			2018
Current federal income tax expense (benefit)	$	-		$	156
Current state income tax expense (benefit)		-			47
Deferred federal income tax expense (benefit)		(12,222	)		3,526
Deferred state income tax expense (benefit)		(2,758	)		796
Provision for (Benefit from) Corporate Business Taxes	$	(14,980	)	$	4,525

The following is a reconciliation of the statutory federal rate to the effective rate, for the periods indicated below (dollars in thousands):

	Nine Months Ended September 30,
	2019					2018
Computed income tax (benefit) expense at federal rate	$	(13,906	)	21.0	%	$	17,035		21.0	%
State taxes (benefit), net of federal tax, if applicable		(2,757	)	4.2	%		832		1.0	%
Provision to return adjustment		-		-	%		4		0.0	%
REIT income not subject to tax (benefit)		1,683		(2.6	)%		(13,346	)	(16.4	)%
Provision for (Benefit from) Corporate Business Taxes/Effective Tax Rate^(A)	$	(14,980	)	22.6	%	$	4,525		5.6	%

(A)	The provision for income taxes is recorded at the TRS level.

The Company’s consolidated balance sheets, at September 30, 2019 and December 31, 2018, contain the following current and deferred tax liabilities and assets, which are recorded at the TRS level (dollars in thousands):

	Nine Months Ended September 30,
	2019		2018
Income taxes payable
Federal income taxes payable	$	-	$	156
State and local income taxes payable		-		47
Income taxes payable	$	-	$	203

	September 30, 2019			December 31, 2018
Deferred tax (assets) liabilities
Deferred tax - organizational expenses	$	-		$	(4	)
Deferred tax - mortgage servicing rights		(12,651	)		2,082
Deferred tax - net operating loss		(250	)		-
Total net deferred tax (assets) liabilities	$	(12,901	)	$	2,078

The deferred tax assets and liabilities as of September 30, 2019 and December 31, 2018, respectively, were each primarily related to MSRs. No valuation allowance has been established at September 30, 2019 or December 31, 2018. As of September 30, 2019 and December 31, 2018, deferred tax liabilities are included in “Accrued expenses and other liabilities” in the interim consolidated balance sheets.

Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company’s interim consolidated financial statements. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these interim consolidated financial statements.

The Company’s 2018, 2017, 2016, 2015, 2014, 2013 and 2012 federal, state and local income tax returns remain open for examination by the relevant authorities.