Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

12. Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with its taxable year ended December 31, 2015 and expects to continue to operate so as to qualify as a REIT. As a result, the Company will generally not be subject to federal and state income tax on that portion of its income that it distributes to stockholders if it distributes at least 90% of its taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains and activity conducted within the Company’s taxable REIT subsidiary (“TRS”), and complies with certain other requirements to qualify as a REIT. Since Commencement of Operations, the Company was in compliance with all REIT requirements and the Company plans to continue to operate so that it meets the requirements for taxation as a REIT. Therefore, other than amounts relating to the Company’s TRS, as described below, the Company has not provided for current income tax expense related to the Company’s REIT taxable income for the years ended December 31, 2021, 2020 and 2019, respectively. Additionally, no provision has been made for federal or state income taxes in the accompanying financial statements, as the Company believes it has met the prescribed requisite requirements.     

The Company’s real estate owned is held in a TRS. A TRS is a corporation that is owned directly or indirectly by a REIT and has jointly elected with the REIT to be treated as a TRS for tax purposes. TRSs provide REITs the flexibility to hold, up to 20% of their total assets, entities or investments that otherwise wouldn’t be permissible in the REIT structure. The Company’s TRS is not consolidated for U.S. federal income tax purposes and is taxed separately as a corporation. For financial reporting purposes, a provision or benefit for current and deferred taxes is established for the portion of earnings or expense recognized by the Company with respect to its TRS. For years ended December 31, 2021, 2020 and 2019, the Company did not record a provision for income taxes, which for 2021 was due to a full valuation allowance that was established against deferred taxes. Additionally, the Company did not have any deferred tax assets or deferred liabilities at December 31, 2021 or 2020.

For the year ended December 31, 2021, the TRS’s Federal statutory income tax rate was 21.00% and 14.44% for state and local income tax purposes for a combined rate of 35.44%. The combined rate includes the federal benefit arising from the state and local income tax deduction allowable for federal tax purposes. For the year ended December 31, 2021, the Company’s effective tax rate 0.0%.

A reconciliation between the U.S. federal statutory income tax rate and the effective tax rate for the year ended December 31, 2021 is as follows:

	Year Ended
	December 31, 2021
US statutory tax rate		21.00	%
REIT income not subject to corporate income tax		-24.52	%
State and local income taxes		-3.50	%
Change in valuation allowance		8.59	%
Other		-1.57	%
		0.00	%

The components of the deferred tax asset consist of the following (in thousands):

	December 31, 2021
Investment basis difference in real estate owned	$	4,018
Net operating loss carryforward		10,627
		14,645
Valuation allowance		(14,645	)
Deferred tax asset	$	—

The TRS had a net operating loss (“NOL”) in the amount of $30.0 million for year ended December 31, 2021, the impact of which has been reflected in the deferred tax asset recorded by the Company.  Deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all

available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.  Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The NOL could be carried forward indefinitely for federal income tax purposes and for a period of 20 years for state and local purposes.  Based upon the available objective evidence at December 31, 2021, the Company determined it was more likely than not that the deferred tax assets of its TRS would not be utilized in future periods. As a result, the Company recorded a $14.6 million valuation allowance to fully reserve against these deferred tax assets.

The Company recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in our consolidated statements of income. As of December 31, 2021 and 2020, the Company has not recorded any amounts for uncertain tax positions.

The Company’s tax returns are subject to audit by taxing authorities. The Company’s tax years 2018 through 2021 remain open to examination by major taxing jurisdictions to which the Company is subject to taxes.