Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Taxes

Taxes

Components of our net deferred tax assets at December 31, 2022 and 2021 are presented in the following table.

Table 23.1 – Deferred Tax Assets (Liabilities)

(In Thousands)	December 31, 2022		December 31, 2021
Deferred Tax Assets
Net operating loss carryforward – state	$	102,795	$	98,011
Net capital loss carryforward – state	17,244		18,082
Net operating loss carryforward – federal	18,738		82
Real estate assets	2,851		1,347
Allowances and accruals	3,035		3,528
Goodwill and intangible assets	26,193		24,973
Other	3,803		3,016
Tax effect of unrealized (gains) / losses - OCI	365		(21)
Total Deferred Tax Assets	175,024		149,018
Deferred Tax Liabilities
Mortgage Servicing Rights	(7,475)		(3,617)
Interest rate agreements	(2,780)		(3,324)
Total Deferred Tax Liabilities	(10,255)		(6,941)
Valuation allowance	(122,838)		(121,210)
Total Net Deferred Tax Asset, net of Valuation Allowance	$	41,931	$	20,867

The deferred tax assets and liabilities reported above, with the exception of the state net operating loss ("NOL") and capital loss carryforwards, relate solely to our TRS. For state purposes, the REIT files a unitary combined return with its TRS. Because the REIT may have state taxable income apportioned to it from the activity of its TRS, we report the entire combined unitary state NOL and capital loss carryforwards as deferred tax assets, including the carryforwards allocated to the REIT.

Realization of our deferred tax assets ("DTAs") at December 31, 2022, is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards (where applicable) and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of the deferred assets is not assured and establish a valuation allowance accordingly. As we experienced full-year 2022 GAAP losses at our TRS, we closely analyzed our estimate of the realizability of our net deferred tax assets in whole and in part. The Company evaluates its deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. This evaluation requires significant judgment and changes to our assumptions could result in a material change in the valuation allowance. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. The Company conducts its evaluation by considering, among other things, all available positive and negative evidence, historical operating results and cumulative earnings analysis, forecasts of future profitability, and the duration of statutory carryforward periods. Based on this analysis, we continue to believe it is more likely than not that we will realize our federal deferred tax assets in future periods as income is earned at our TRS; therefore, there continues to be no material valuation allowance recorded against our net federal DTAs. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as we remained uncertain about our ability to generate sufficient income in future periods needed to utilize net state DTAs beyond the reversal of our state DTLs. The net increase in the total valuation allowance was $2 million in 2022.

For the year ended December 31, 2021, we reassessed the valuation allowance on our deferred tax assets ("DTAs") noting an increase in positive evidence related to our ability to utilize certain DTAs. At the time of the evaluation, the positive evidence included significant revenue growth in recent quarters and expectations regarding future profitability at our TRS. After assessing both the positive and negative evidence, we determined it was more likely than not that we would realize all of our federal DTAs. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we would realize a portion of our state DTAs and, as such, reversed $3 million of state valuation allowance as a discrete item in the third quarter of 2021.

Our estimate of net deferred tax assets could change in future periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations. We assessed our tax positions for all open tax years (i.e., Federal, 2019 to 2022, and State, 2018 to 2022) and, at December 31, 2022 and 2021, concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

At December 31, 2022, our federal NOL carryforward at the REIT was $37 million, of which $29 million will expire in 2029 and $9 million will carry forward indefinitely. In order to utilize NOLs at the REIT, taxable income must exceed dividend distributions. At December 31, 2022, our taxable REIT subsidiaries had $89 million of federal NOLs which will carry forward indefinitely. Redwood and its taxable REIT subsidiaries accumulated an estimated state NOL of $1.20 billion at December 31, 2022. These NOLs expire beginning in 2031. If certain substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of the carryforwards that can be utilized.

The following table summarizes the provision for income taxes for the years ended December 31, 2022, 2021, and 2020.

Table 23.2 – Provision for Income Taxes

	Years Ended December 31,
(In Thousands)	2022		2021		2020
Current Provision for Income Taxes
Federal	$	340	$	28,718	$	1,598
State	496		9,859		(182)
Total Current Provision for Income Taxes	836		38,577		1,416
Deferred (Benefit) Provision for Income Taxes
Federal	(19,083)		(17,172)		(6,024)
State	(1,673)		(2,927)		—
Total Deferred (Benefit) Provision for Income Taxes	(20,756)		(20,099)		(6,024)
Total (Benefit From) Provision for Income Taxes	$	(19,920)	$	18,478	$	(4,608)

The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at December 31, 2022, 2021, and 2020.

Table 23.3 – Reconciliation of Statutory Tax Rate to Effective Tax Rate

	December 31, 2022		December 31, 2021		December 31, 2020
Federal statutory rate	21.0	%	21.0	%	21.0	%
State taxes, net of federal tax effect, as applicable	0.9	%	1.8	%	—	%
Differences in taxable income from GAAP income	(0.5)	%	(2.9)	%	(1.4)	%
Change in valuation allowance	—	%	(4.9)	%	(2.8)	%
REIT GAAP income or loss not subject to federal income tax	(10.5)	%	(9.5)	%	(16.0)	%
Effective Tax Rate	10.9	%	5.5	%	0.8	%

We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.