Income Taxes

3 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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, 2021, 2020 and 2019.

	Year Ended December 31,
Tax Characteristic	2021		2020		2019
Ordinary income	96.4	%	58.2	%	85.0	%
Return of capital	—	%	37.9	%	9.4	%
Capital gains	3.6	%	3.9	%	5.6	%
	100.0	%	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, 2021, there was no material impact on the Company's tax provision as a result of the CARES Act.

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, 2021, 2020, and 2019, the Company recorded income tax expense of $3.1 million, $11.4 million, and $1.6 million respectively.

The following table summarizes the Company's income tax provision for the years ended December 31, 2021, 2020, and 2019.

	As of
(In thousands)	December 31, 2021		December 31, 2020		December 31, 2019
Current income tax provision
Federal	$	393	$	38	$	185
State	36		602		293
Total current income tax provision, net	429		640		478
Deferred income tax provision
Federal	2,927		6,638		1,080
State	(212)		4,099		—
Total deferred income tax provision, net	2,715		10,737		1,080
Total income tax provision	$	3,144	$	11,377	$	1,558

The following table details the components of the Company's net deferred tax asset (liability) at December 31, 2021 and 2020.

	As of
(In thousands)	December 31, 2021		December 31, 2020
Deferred tax asset
Net operating loss available for carry-back and carry-forward(1)	$	—	$	1,937
Basis difference for investments	3,170		1,481
Deferred tax asset	3,170		3,419
Deferred tax liability
Basis difference for investments	(17,992)		(15,525)
Deferred tax liability	(17,992)		(15,525)
Net deferred tax asset (liability)	$	(14,822)	$	(12,106)

(1)Includes state net operating losses available for carry-back and carry-forward as of December 31, 2021 and 2020 of $0.7 million and $0.8 million, respectively. These deferred tax assets were fully offset by a valuation allowance.

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, 2021, 2020, and 2019.

	Year Ended December 31,
	2021		2020		2019
Federal statutory rate	21.00	%	21.00	%	21.00	%
State statutory rate, net of federal benefit	(0.13)	%	11.83	%	0.45	%
Income attributable to non-controlling interests	(1.09)	%	(1.78)	%	(1.28)	%
REIT earnings not subject to corporate taxes	(17.51)	%	(2.43)	%	(17.76)	%
Effective tax rate	2.27	%	28.62	%	2.41	%

Based on its analysis of any potential uncertain income tax positions, the Company concluded it did not have any uncertain tax positions that meet the recognition or measurement criteria of ASC 740 as of December 31, 2021 and 2020. Tax authorities in the relevant jurisdictions may select the Company's tax returns for audit and propose adjustments before the expiration of the statute of limitations. Tax returns filed for the Company's open tax years or any ongoing audits remain open to adjustment in the major tax jurisdictions.