Taxes

12 Months Ended

Dec. 31, 2019

Components of our net deferred tax assets at December 31, 2019 and December 31, 2018 are presented in the following table.

Table 23.1 – Deferred Tax Assets (Liabilities)



(In Thousands)	December 31, 2019			December 31, 2018
Deferred Tax Assets
Net operating loss carryforward – state	$	98,554		$	103,858
Net operating loss carryforward – federal	82			—
Real estate assets	676			2,400
Interest rate agreements	—			2,320
Allowances and accruals	1,930			1,830
Goodwill and intangible assets	2,739			—
Other	1,749			1,586
Total Deferred Tax Assets	105,730			111,994
Deferred Tax Liabilities
Mortgage Servicing Rights	(13,783		)	(20,068		)
Interest rate agreements	(42		)	—
Total Deferred Tax Liabilities	(13,825		)	(20,068		)
Valuation allowance	(97,057		)	(100,948		)
Total Deferred Tax Asset (Liability), net of Valuation Allowance	$	(5,152	)	$	(9,022	)

The deferred tax assets and liabilities reported above, with the exception of the state net operating loss ("NOL") 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 NOL 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, 2019, 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 2019 and 2018, we are reporting net federal ordinary and capital deferred tax liabilities ("DTLs") at December 31, 2019 and December 31, 2018 and consequently no valuation allowance was recorded against any federal DTA in either of these periods. Consistent with prior periods, at December 31, 2019, 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, 2016 to 2019, and State, 2015 to 2019) and, at December 31, 2019 and December 31, 2018, concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

At December 31, 2019, our federal NOL carryforward at the REIT was $28 million, which will expire in 2029. In order to utilize NOLs at the REIT, taxable income must exceed dividend distributions. At December 31, 2019, our taxable REIT subsidiaries had $0.4 million of federal NOLs, which will carry forward indefinitely. Redwood and its taxable subsidiaries accumulated an estimated state NOL of $1.15 billion at December 31, 2019. 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, 2019, 2018, and 2017.

Table 23.2 – Provision for Income Taxes



	Years Ended December 31,
(In Thousands)	2019			2018			2017
Current Provision for Income Taxes
Federal	$	12,036		$	11,387		$	512
State	897			820			361
Total Current Provision for Income Taxes	12,933			12,207			873
Deferred (Benefit) Provision for Income Taxes
Federal	(3,976		)	(1,419		)	10,991
State	(1,517		)	300			(112		)
Total Deferred (Benefit) Provision for Income Taxes	(5,493		)	(1,119		)	10,879
Total Provision for Income Taxes	$	7,440		$	11,088		$	11,752

The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at December 31, 2019, 2018, and 2017.

Table 23.3 – Reconciliation of Statutory Tax Rate to Effective Tax Rate



	December 31, 2019		December 31, 2018		December 31, 2017
Federal statutory rate	21.0	%	21.0	%	34.0	%
State statutory rate, net of Federal tax effect	8.6	%	8.6	%	7.2	%
Differences in taxable (loss) income from GAAP income	(2.1	)%	(1.7	)%	(3.9	)%
Change in valuation allowance	(2.2	)%	1.9	%	(1.0	)%
Dividends paid deduction	(21.1	)%	(21.3	)%	(23.4	)%
Federal statutory rate change	—	%	—	%	(5.2	)%
Effective Tax Rate	4.2	%	8.5	%	7.7	%

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.