Note 20. Taxes

Components of our net deferred tax assets at December 31, 2014 and 2013 are presented in the following table.

Deferred Tax Assets (Liabilities)


(In Thousands)	December 31, 2014			December 31, 2013
Deferred tax assets
Net operating loss carryforward – state	$	91,579			90,138
Net capital loss carryforward – state		27,308			34,189
Net operating loss carryforward – federal		18,765			10,254
Net capital loss carryforward – federal		7,903			6,905
Allowances and accruals		2,355			5,667
Other		210			170

Total deferred tax assets		148,120			147,323
Deferred Tax Liabilities
Real estate assets		(44,402	)		(34,935	)
Interest rate agreements		(87	)		(535	)
Tax effect of unrealized gains – OCI		(2,684	)		—

Total deferred tax liabilites		(47,173	)		(35,470	)
Valuation allowance		(111,183	)		(119,169	)

Total Deferred Tax Liabilities, net of Valuation Allowance	$	(10,236	)	$	(7,316	)

The deferred tax assets and liabilities reported above, with the exception of the state net operating loss and capital loss carryforwards, relate solely to our TRS. For state purposes, the REIT files a unitary combined return with its TRS. Because the REIT may have state taxable income apportioned to it from the activity of its TRS, we report the entire combined unitary state net operating loss and capital loss carryforwards as deferred tax assets, including the carryforwards allocated to the REIT.

Realization of our deferred tax assets at December 31, 2014, is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of the deferred assets is not assured and establish a valuation allowance accordingly. Our deferred tax asset valuation allowance decreased during 2014, as compared to 2013, due to a decrease in our net state deferred tax assets. We remain uncertain about our ability to generate sufficient taxable income or capital gains in future periods needed to utilize our state net deferred tax assets and continue to provide a full valuation allowance against these amounts. Our estimate of net deferred tax assets could change in future periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations. We assessed our tax positions for all open tax years (i.e., Federal, 2011 to 2014, and State, 2010 to 2014) and, at December 31, 2014 and 2013, concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

The following table summarizes the provision for income taxes for the years ended December 31, 2014, 2013, and 2012.

Provision for Income Taxes


	Years Ended December 31,
(In Thousands)	2014		2013		2012
Current provision for income taxes
Federal	$	24	$	3,490	$	944
State		17		142		347

Total current provision for income taxes		41		3,632		1,291
Deferred provision for income taxes
Federal		703		7,316		—

Total Provision for Income Taxes	$	744	$	10,948	$	1,291

Our dividend distribution requirements will remain at zero until we generate taxable income in excess of our NOL carryforward at the REIT. At December 31, 2014, our federal NOL carryforward at the REIT was $70 million, which will expire in 2029. In order to utilize NOLs at the REIT, taxable income must exceed dividend distributions. At December 31, 2014, our taxable REIT subsidiaries had federal NOLs of $55 million, which will expire between 2030 and 2034. Redwood and its taxable subsidiaries accumulated an estimated state NOL of $1.3 billion at December 31, 2014. These NOLs expire beginning in 2028. If certain substantial changes in the Company’s ownership occur, there could be an annual limitation on the amount of the carryforwards that can be utilized.

The following is a reconciliation of the statutory federal and state rates to the effective rates, for the years ended December 31, 2014 and 2013.

Reconciliation of Statutory Tax Rate to Effective Tax Rate


	Years Ended Decmber 31,
	2014		2013
Federal statutory rate		34.0 %		34.0%
State statutory rate, net of Federal tax effect		7.2 %		7.2%
Differences in taxable (loss) income from GAAP income		(14.5)%		(1.9)%
Change in valuation allowance		(0.1)%		(16.4)%
Dividends paid deduction		(25.9)%		(17.0)%

Effective Tax Rate		0.7 %		5.9%

We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we did not meet the requirements for statutory relief, we could be subject to a 100% prohibited transaction tax for certain transactions, be required to distribute additional dividends, or be subject to federal income tax at regular corporate rates. We could also potentially lose our REIT status. Any of these outcomes could have a material adverse impact on our consolidated financial statements.