Income Taxes

12 Months Ended

Dec. 31, 2015

Taxation as a REIT through December 31, 2014

Generally, REITs are not subject to federal income tax on REIT taxable income distributed to its shareholders. REIT taxable income or loss, as generated by qualifying REIT activities, is computed in accordance with the Internal Revenue Code, which is different from the financial statement net income or loss as computed in accordance with GAAP. Depending on the number and size of the various items or transactions being accounted for differently, the differences between the Company’s REIT taxable income or loss and its GAAP financial statement net income or loss can be substantial and each item can affect several years. Bimini Capital’s qualification as a REIT depended upon its ability to meet, on an annual or in some cases quarterly basis, various complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of its shares.

As taxable REIT subsidiaries (“TRS”), Bimini Advisors and MortCo were tax paying entities for income tax purposes and are taxed separately from Bimini Capital, Orchid and from each other. Therefore, through December 31, 2014, Bimini Advisors and MortCo each separately computed and reported an income tax provision or benefit based on their own taxable activities.

Taxation Beginning January 1, 2015

Certain trends and events experienced during 2015 have caused Bimini Capital to no longer meet the Code’s rules and regulations to be taxed as a REIT, effective January 1, 2015. In particular, additional offerings of common stock by Orchid in 2015 increased revenue attributable to management fees received from Orchid by Bimini Advisors. In addition, payments that have been and will be made by Bimini Capital pursuant to a litigation settlement agreement entered into in 2015 have reduced and may continue to reduce the value of Bimini Capital’s assets and the amount of revenues generated by our MBS portfolio. Consequently, the value of Bimini’s two subsidiaries (MortCo and Bimini Advisors) has increased in relation to the value of Bimini Capital’s assets to a level that that exceeds the limits for a REIT permitted under the Code.

The failure to qualify as a REIT subjects Bimini Capital’s taxable income to federal and state corporate income taxes at regular corporate rates. However, Bimini Capital and its subsidiaries have NOL carryforwards that will be available to offset taxable income, if any, in 2015 and future periods. Management is implementing certain internal restructuring transactions that would maximize its ability to utilize the existing federal NOL carryforwards.

Income Tax Benefit Summary

The income tax benefit included in the consolidated statements of operations consists of the following for the years ended December 31, 2015 and 2014:

(in thousands)
		2015		2014
Current	$	482	$	22
Deferred		(62,932)		(1,900)
Income tax benefit	$	(62,450)	$	(1,878)

The income tax benefit differs from the amount computed by applying the federal income tax statutory rate of 34 percent on income before income tax expense. A reconciliation of income tax at the statutory rate to income tax benefit for the years ended December 31, 2015 and 2014 is presented in the table below.

(in thousands)
		2015		2014
Federal tax based on statutory rate	$	(1,094)	$	9,798
State income tax		(194)		1,120
Benefit of REIT exemption		-		(779)
Income attributable to non-controlling interest		-		(8,629)
Adjustment to record beginning deferred taxes due to change to taxable status		(9,187)		-
Reduction of deferred tax asset valuation allowance		(52,135)		(3,410)
Other		160		22
Income tax benefit	$	(62,450)	$	(1,878)

Deferred tax assets consisted of the following as of December 31, 2015 and 2014:

(in thousands)
			2015		2014
Deferred tax assets:
	Net operating loss carryforwards	$	99,106	$	94,440
	Tax hedges		591		-
	Orchid Island Capital, Inc. common stock		3,787		-
	Accrued expenses		528		1,077
	Management agreement		1,267		1,251
	Other		377		145
			105,656		96,913
Valuation allowance			(40,824)		(95,013)
Net deferred tax assets		$	64,832	$	1,900

As of December 31, 2015 and 2014, Bimini Capital had tax capital loss carryforwards of approximately $0.6 million and $0.5 million, respectively, which can be used to offset future realized tax capital gains. The capital loss carryforwards will begin to expire in 2018. In addition, as of December 31, 2015 and 2014, Bimini Capital had estimated federal NOL carryforwards of approximately $21.3 million and $17.3 million, respectively, and estimated Florida NOL carryforwards of $20.6 million and $16.5 million, respectively. The NOL carryforwards can be used to offset future taxable income and will begin to expire in 2028.

As of December 31, 2015, MortCo had estimated federal NOL carryforwards of approximately $261.3 million and estimated available Florida NOLs of approximately $33.9 million. As of December 31, 2014, MortCo had estimated federal NOL carryforwards of approximately $263.9 million and estimated available Florida NOLs of approximately $36.4 million. These NOLs can be used to offset future taxable income and will begin to expire in 2025.

As of December 31, 2014, Bimini Advisors had estimated federal and Florida NOL carryforwards of approximately $1.6 million. These NOLs were fully utilized during the 2015 tax year to offset taxable income. In connection with Orchid’s IPO, Bimini Advisors paid for, and expensed for GAAP purposes, certain offering costs totaling approximately $3.2 million. For tax purposes, these offering costs created an intangible asset related to the management agreement with a tax basis of $3.2 million. The deferred tax asset related to the intangible asset at December 31, 2015 and 2014 total approximately $1.3 million.

In assessing the realizability of deferred tax assets, management 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 capital loss and NOL carryforwards is dependent upon the generation of future capital gains and taxable income in periods prior to their expiration. The valuation allowance relates primarily to the ability to utilize the NOL carryforwards of MortCo in future periods and is based on management’s estimated projections of future taxable income.

MortCo holds residual interests in various real estate mortgage investment conduits (“REMICs”), some of which generate excess inclusion income (“EII”), a type of taxable income pursuant to specific provisions of the Code. During 2010 (as part of the filing of its 2009 tax returns), MortCo reached a tax filing position related to the EII taxable income that was different from what was reported in previous periods, and included a notice of inconsistent treatment in its tax returns. MortCo continues to file its tax returns following its 2009 tax filing position, and it continues to include a notice of inconsistent treatment in each return.

The Company does not believe it has any unrecognized tax benefits included in its consolidated financial statements. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations.