Income Taxes

12 Months Ended

Dec. 31, 2019

The Company believes that, commencing on January 1, 2019, it was organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws and that its manner of operation enables it to meet the requirements for qualification and taxation as a REIT. A REIT is generally not subject to U.S. federal, state, and local income tax on the portion of its income that is distributed to its owners if it distributes at least 90% of its REIT taxable income within the prescribed time frames, determined without regard to the deduction for dividends paid and excluding any net capital gains. The Company intends to operate in a manner which will allow it to continue to meet the requirements for qualification as a REIT. Accordingly, Ellington Financial Inc. does not believe that it will be subject to U.S. federal, state, and local income tax on the portion of its net taxable income that is distributed to its stockholders as long as certain asset, income, and share ownership tests are met.

Cash dividends declared by the Company that do not exceed its current or accumulated earnings and profits will be considered ordinary income to stockholders for income tax purposes unless all or a portion of a dividend is designated by the Company as a capital gain dividend. Distributions in excess of the Company's current and accumulated earnings and profits will be characterized as return of capital or capital gains.

The following table details the tax characteristics of the Company's dividends declared on its shares of common and preferred stock for the year ended December 31, 2019.



Tax Characteristic	Year Ended December 31, 2019
Ordinary income	85.0	%
Return of capital	9.4	%
Capital gains	5.6	%
	100.0	%

Certain foreign and domestic subsidiaries of the Company have elected to be treated as TRSs and therefore are taxed as corporations for U.S. federal, state, and local income tax purposes. To the extent that those entities incur U.S. federal, state, or local income taxes, or foreign income taxes, such taxes are recorded in the Company's consolidated financial statements.

For the year ended December 31, 2019, the Company recorded income tax expense of $1.6 million, of which $1.1 million related to a net deferred tax liability. The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities under U.S. GAAP and the carrying amounts used for income tax purposes.

Taxable income can differ from net income (loss) principally due to differences in the timing of recognition of interest, taxes, depreciation, and amortization of assets.

The following table summarizes the Company's income tax provision for the year ended December 31, 2019.



(In thousands)	Year Ended December 31, 2019
Current income tax provision
Federal	$	185
State	293
Total current income tax provision, net	478
Deferred income tax provision
Federal	1,080
State	—
Total deferred income tax provision, net	1,080
Total income tax provision	$	1,558

The following table details the components of the Company's net deferred tax asset (liability) at December 31, 2019.



(In thousands)	Year Ended December 31, 2019
Deferred tax asset
Net operating loss available for carry-back and carry-forward	$	3,907
Basis difference for investments	669
Valuation allowance	(157		)
Deferred tax asset	4,419
Deferred tax liability
Basis difference for investments	(5,484		)
Deferred tax liability	(5,484		)
Net deferred tax asset (liability)	$	(1,065	)

The following table details the reconciliation between the Company's U.S. federal and state statutory income tax rate and the effective tax rate for the year ended December 31, 2019.



	Year Ended December 31, 2019
Federal statutory rate	21.00	%
State statutory rate, net of federal benefit	0.45	%
Income attributable to non-controlling interests	(1.28	)%
REIT earnings not subject to corporate taxes	(17.76	)%
Effective tax rate	2.41	%

Income Taxes

The Company has certain subsidiaries that have elected to be treated as corporations for U.S. federal, state, and local income tax purposes. The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities under U.S. GAAP and the amounts used for income tax purposes. As of December 31, 2018, one of the Company's domestic TRS's had a net operating loss carry-forward, resulting in a gross deferred tax asset, which has been fully reserved through a valuation allowance.