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Income Taxes
 12 Months Ended
Dec. 31, 2023
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, 2023, 2022, and 2021.
Year Ended December 31,
Tax Characteristic202320222021
Ordinary income71.3 %69.0 %96.4 %
Return of capital28.2 %30.4 %— %
Capital gains0.5 %0.6 %3.6 %
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 tax expense is recognized by the Company.
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, 2023, 2022, and 2021, the Company recorded income tax expense (benefit) of $0.5 million, $(17.7) million, and $3.1 million, respectively. The income tax benefit for the year ended December 31, 2022 was related to net realized and unrealized losses on investments held in a domestic TRS. Conversely, the income tax expense for the year ended December 31, 2021 was related to net realized and unrealized gains on investments held in a domestic TRS.
The Company evaluates its deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical profitability and projections of future taxable income. Based upon the available evidence at December 31, 2023, 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; a valuation allowance of $83.9 million was recorded to fully reserve against these deferred tax assets.
The following table summarizes the Company's (benefit) provision for income tax for the years ended December 31, 2023, 2022, and 2021.
As of December 31,
(In thousands)202320222021
Current provision for income tax
Federal$— $— $393 
State457 — 36 
Total current provision for income tax, net457 — 429 
Deferred (benefit) provision for income tax (1)
Federal— (13,229)2,927 
State— (4,487)(212)
Total deferred (benefit) provision for income tax, net— (17,716)2,715 
Total (benefit) provision for income tax$457 $(17,716)$3,144 
(1)Includes income tax expense (benefit) of $(2.9) million from a bargain purchase gain for the year ended December 31, 2022.
The following table details the components of the Company's net deferred tax asset (liability) at December 31, 2023 and 2022.
As of December 31,
(In thousands)20232022
Deferred tax asset
Net operating loss available for carry-back and carry-forward(1)(2)
$84,185 $25,508 
Net capital loss carry-forward(2)
12,746 — 
Basis difference for investments(13,001)(13,199)
Valuation allowance(83,930)(12,309)
Deferred tax asset— — 
Deferred tax liability
Basis difference for investments— — 
Valuation allowance— — 
Deferred tax liability— — 
Net deferred tax asset (liability), net of valuation allowance$— $— 
(1)Includes state net operating losses available for carry-back and carry-forward as of December 31, 2023 and 2022 of $20.8 million and $6.7 million, respectively. These deferred tax assets were fully offset by a valuation allowance.
(2)Includes deferred tax assets for net operating losses of $45.1 million and net capital loss carry-forwards of $35.9 million related to the Arlington Merger. Of the deferred tax assets relating to net capital loss carry-forwards acquired, $28.0 million expired as of December 31, 2023.
The net operating loss and net capital loss carry-forward balance as of December 31, 2023, shown in the table above, is related to pretax U.S. federal and state net operating loss and net capital loss carry-forwards of $322.5 million and $48.8 million respectively, as of December 31, 2023. If not utilized, certain U.S. federal and state net operating loss and net capital loss carry-forwards will expire between 2026 and 2028, whereas others have an unlimited carryforward period.
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, 2023, 2022, and 2021.
Year Ended December 31,
202320222021
Federal statutory rate21.00 %21.00 %21.00 %
State statutory rate, net of federal benefit0.54 %4.41 %(0.13)%
Income attributable to non-controlling interests(0.76)%0.07 %(1.09)%
REIT earnings not subject to corporate taxes(29.58)%2.72 %(17.51)%
Deferred tax loss— %3.22 %— %
Bargain purchase gain— %2.37 %— %
Change in valuation allowance9.34 %(13.85)%— %
Effective tax rate0.54 %19.94 %2.27 %
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, 2023 or 2022. 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.