Income Taxes

12 Months Ended

Dec. 31, 2020

The Company has elected to be taxed as a REIT under the Code. 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 years ended December 31, 2020 and 2019.


	Year Ended
Tax Characteristic	December 31, 2020		December 31, 2019
Ordinary income	58.2	%	85.0	%
Return of capital	37.9	%	9.4	%
Capital gains	3.9	%	5.6	%
	100.0	%	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, or are expected to incur, U.S. federal, state, or local income taxes, or foreign income taxes, such taxes are recorded in the Company's consolidated financial statements.

In response to the negative economic impact of the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act, or the "CARES Act," was signed into law on March 27, 2020, and provided for significant stimulus spending and included numerous tax provisions. As of December 31, 2020, there was no material impact on the Company's tax provision as a result of the CARES Act; however, the Company continues to monitor and evaluate the impact of the CARES Act and other COVID-19-related legislation.

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, or "ASC 740." 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. For the years ended December 31, 2020 and 2019, the Company recorded an income tax expense of $11.4 million and $1.6 million, respectively. The increase in income tax expense for the year ended December 31, 2020, was primarily due to an increase in deferred tax liabilities related to unrealized gains on investments held in a domestic TRS.

The following table summarizes the Company's income tax provision for the years ended December 31, 2020 and 2019.


	As of
(In thousands)	December 31, 2020		December 31, 2019
Current income tax provision
Federal	$	38	$	185
State	602		293
Total current income tax provision, net	640		478
Deferred income tax provision
Federal	6,638		1,080
State	4,099		—
Total deferred income tax provision, net	10,737		1,080
Total income tax provision	$	11,377	$	1,558

The following table details the components of the Company's net deferred tax asset (liability) at December 31, 2020 and 2019.


	As of
(In thousands)	December 31, 2020		December 31, 2019
Deferred tax asset
Net operating loss available for carry-back and carry-forward	$	1,937	$	3,907

Basis difference for investments	1,481		669
Valuation allowance	—		(157)

Deferred tax asset	3,419		4,419
Deferred tax liability
Basis difference for investments	(15,525)		(5,484)
Deferred tax liability	(15,525)		(5,484)
Net deferred tax asset (liability)	$	(12,106)	$	(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 years ended December 31, 2020 and 2019.


	Year Ended
	December 31, 2020		December 31, 2019
Federal statutory rate	21.00	%	21.00	%
State statutory rate, net of federal benefit	11.83	%	0.45	%
Income attributable to non-controlling interests	(1.78)	%	(1.28)	%
REIT earnings not subject to corporate taxes	(2.43)	%	(17.76)	%
Effective tax rate	28.62	%	2.41	%

Income TaxesThe 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.