Income Taxes

6 Months Ended

Jun. 30, 2021

Income Taxes [Abstract]

Income Taxes

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 Sub-REIT 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):

	Six Months Ended June 30,
	2021			2020
Current federal income tax benefit	$	(128	)	$	-
Deferred federal income tax expense (benefit)		1,595			(14,302	)
Deferred state income tax expense (benefit)		166			(1,130	)
Provision for (benefit from) Corporate Business Taxes	$	1,633		$	(15,432	)

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

	Six Months Ended June 30,
	2021					2020
Computed income tax expense (benefit) at federal rate	$	2,361		21.0	%	$	(16,160	)	21.0	%
State tax expense (benefit), net of federal tax, if applicable		159		1.4	%		(1,130	)	1.5	%
Permanent differences in taxable income from GAAP pre-tax income		66		0.5	%		-		-
REIT income not subject to tax (benefit)		(953	)	(8.5	)%		1,858		(2.4	)%
Provision for (benefit from) Corporate Business Taxes/Effective Tax Rate(A)	$	1,633		14.4	%	$	(15,432	)	20.1	%

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

The Company’s consolidated balance sheets, at June 30, 2021 and December 31, 2020, contain the following income taxes recoverable and deferred tax assets, which are recorded at the TRS level (dollars in thousands):

	June 30, 2021		December 31, 2020
Income taxes recoverable
Federal income taxes recoverable	$	128	$	-
Income taxes recoverable	$	128	$	-

	June 30, 2021		December 31, 2020
Deferred tax assets
Deferred tax - mortgage servicing rights	$	11,791	$	15,176
Deferred tax - net operating loss		7,971		6,347
Total net deferred tax assets	$	19,762	$	21,523

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. The Company’s net operating losses (“NOLs”) were created subsequent to 2017 and can be carried forward indefinitely pursuant to the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) passed on December 22, 2017. As of June 30, 2021, the Company believes it is more likely than not that it will fully realize its deferred tax assets. Deferred tax assets are included in “Receivables and other assets” in the consolidated balance sheets.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the 2017 Tax Act. Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. The CARES Act did not have a material financial impact on the Company’s consolidated financial statements.

Based on the Company's evaluation, the Company has concluded that there are no significant liabilities for unrecognized tax benefits required to be reported in the Company's financial statements. Additionally, there were no amounts accrued for penalties or interest as of or during the period presented in these financial statements.

The Company’s 2019, 2018 and 2017 federal, state and local income tax returns remain open for examination by the relevant authorities.

Distributions to stockholders generally will be primarily taxable as ordinary income, although a portion of such distributions may be designated as qualified dividend income or may constitute a return of capital. The Company furnishes annually to each stockholder a statement setting forth distributions paid during the preceding year and their U.S. federal income tax treatment.