Taxes

Components of our net deferred tax assets at December 31, 2017 and December 31, 2016 are presented in the following table.

Table 20.1 – Deferred Tax Assets (Liabilities)



(In Thousands)	December 31, 2017			December 31, 2016
Deferred Tax Assets
Net operating loss carryforward – state	$	108,085		$	89,350
Net capital loss carryforward – state	—			15,346
Net operating loss carryforward – federal	—			9,537
Net capital loss carryforward – federal	535			2,283
Real estate assets	—			5,601
Interest rate agreements	1,380			—
Allowances and accruals	2,044			3,059
Other	1,844			2,192
Total Deferred Tax Assets	113,888			127,368
Deferred Tax Liabilities
Real estate assets	(562		)	—
Mortgage Servicing Rights	(20,540		)	(22,531		)
Interest rate agreements	—			(2,167		)
Tax effect of unrealized gains – OCI	(1,166		)	(1,636		)
Total Deferred Tax Liabilities	(22,268		)	(26,334		)
Valuation allowance	(103,384		)	(101,932		)
Total Deferred Tax Asset (Liability), net of Valuation Allowance	$	(11,764	)	$	(898	)

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 ("DTAs") at December 31, 2017, 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.

As a result of GAAP income generated at our TRS in 2017 and 2016, we are reporting net federal ordinary and capital deferred tax liabilities ("DTLs") at December 31, 2017 and December 31, 2016 and consequently no valuation allowance was recorded against any federal DTA in either of these periods. Consistent with prior periods, at December 31, 2017, we continued to maintain a valuation allowance against our net state DTAs as we remain uncertain about our ability to generate sufficient income in future periods needed to utilize net state DTAs beyond the reversal of our state DTLs.

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, 2014 to 2017, and State, 2013 to 2017) and, at December 31, 2017 and December 31, 2016, concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

At December 31, 2017, our federal NOL carryforward at the REIT was $57 million, which will expire in 2029. In order to utilize NOLs at the REIT, taxable income must exceed dividend distributions. At December 31, 2017, our taxable REIT subsidiaries had no federal NOLs, as they were fully utilized in 2017. Redwood and its taxable subsidiaries accumulated an estimated state NOL of $1.26 billion at December 31, 2017. These NOLs expire beginning in 2029. 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 table summarizes the provision for income taxes for the years ended December 31, 2017, 2016, and 2015.

Table 20.2 – Provision for Income Taxes



	Years Ended December 31,
(In Thousands)	2017			2016			2015
Current Provision for Income Taxes
Federal	$	512		$	1,477		$	144
State	361			331			167
Total Current Provision for Income Taxes	873			1,808			311
Deferred Provision for Income Taxes
Federal	10,991			1,910			(10,198		)
State	(112		)	(10		)	(459		)
Total Deferred Provision for (Benefit from) Income Taxes	10,879			1,900			(10,657		)
Total Provision for (Benefit from) Income Taxes	$	11,752		$	3,708		$	(10,346	)

The total provision for income taxes for the year ended December 31, 2017 included a benefit of $8 million due to a reduction of net deferred tax liabilities resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act”) that reduces the federal statutory tax rate for tax years beginning after December 31, 2017. In accordance with Staff Accounting Bulletin No. 118, the Company has determined that the income tax effects for the year ended December 31, 2017 related to the Tax Act are complete and no amounts are estimated, provisional, or incomplete.

The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at December 31, 2017, 2016, and 2015.

Table 20.3 – Reconciliation of Statutory Tax Rate to Effective Tax Rate



	December 31, 2017		December 31, 2016		December 31, 2015
Federal statutory rate	34.0	%	34.0	%	34.0	%
State statutory rate, net of Federal tax effect	7.2	%	7.2	%	7.2	%
Differences in taxable (loss) income from GAAP income	(3.9	)%	(1.0	)%	(20.3	)%
Change in valuation allowance	(1.0	)%	(11.2	)%	6.1	%
Dividends paid deduction	(23.4	)%	(26.3	)%	(38.3	)%
Federal statutory rate change	(5.2	)%	—	%	—	%
Effective Tax Rate	7.7	%	2.7	%	(11.3	)%

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 corporate income tax on our taxable income. We could also potentially lose our REIT status. Any of these outcomes could have a material adverse impact on our consolidated financial statements.