Income Taxes

12 Months Ended

Dec. 31, 2022

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, 2022, 2021 and 2020.

	Year Ended December 31,
Tax Characteristic	2022		2021		2020
Ordinary income	69.0	%	96.4	%	58.2	%
Return of capital	30.4	%	—	%	37.9	%
Capital gains	0.6	%	3.6	%	3.9	%
	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.

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, 2022, 2021, and 2020, the Company recorded income tax expense (benefit) of $(17.7) million, $3.1 million, and $11.4 million, respectively. The reversal in the Company's income tax accrual period over period was the result of net realized and unrealized losses in a domestic TRS for the year ended December 31, 2022 as compared to net realized and unrealized gains in a domestic TRS for the years ended December 31, 2021 and 2020. Based upon the available evidence at December 31, 2022, the Company determined that it was more likely than not that the deferred tax assets of its TRS would not be utilized in future periods. As a result, the Company recorded a $12.3 million valuation allowance to fully reserve against these deferred tax assets.

The following table summarizes the Company's (benefit) provision for income tax for the years ended December 31, 2022, 2021, and 2020.

	As of
(In thousands)	December 31, 2022		December 31, 2021		December 31, 2020
Current provision for income tax
Federal	$	—	$	393	$	38
State	—		36		602
Total current provision for income tax, net	—		429		640
Deferred (benefit) provision for income tax (1)
Federal	(13,229)		2,927		6,638
State	(4,487)		(212)		4,099
Total deferred (benefit) provision for income tax, net	(17,716)		2,715		10,737
Total (benefit) provision for income tax	$	(17,716)	$	3,144	$	11,377

(1)Includes income tax expense (benefit) of $(2.9) million from bargain purchase gain.

The following table details the components of the Company's net deferred tax asset (liability) at December 31, 2022 and 2021.

	As of
(In thousands)	December 31, 2022		December 31, 2021(2)
Deferred tax asset
Net operating loss available for carry-back and carry-forward(1)	$	25,508	$	—
Basis difference for investments(1)	(13,199)		—
Valuation allowance	(12,309)		—
Deferred tax asset	—		—
Deferred tax liability
Basis difference for investments(1)	—		(14,822)
Valuation allowance	—		—
Deferred tax liability	—		(14,822)
Net deferred tax asset (liability), net of valuation allowance	$	—	$	(14,822)

(1)Includes state net operating losses available for carry-back and carry-forward as of December 31, 2022 and 2021 of $6.7 million and $0.7 million, respectively. These deferred tax assets were fully offset by a valuation allowance.

(2)Prior period conformed to current period presentation.

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, 2022, 2021, and 2020.

	Year Ended December 31,
	2022		2021		2020
Federal statutory rate	21.00	%	21.00	%	21.00	%
State statutory rate, net of federal benefit	4.41	%	(0.13)	%	11.83	%
Income attributable to non-controlling interests	0.07	%	(1.09)	%	(1.78)	%
REIT earnings not subject to corporate taxes	2.72	%	(17.51)	%	(2.43)	%
Deferred tax loss	3.22	%	—	%	—	%
Bargain purchase gain	2.37	%	—	%	—	%
Change in valuation allowance	(13.85)	%	—	%	—	%
Effective tax rate	19.94	%	2.27	%	28.62	%

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, 2022 and 2021. 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.