INCOME TAX
The Company wholly owns ACRC 2017-FL3 TRS LLC, which is a taxable REIT subsidiary (“TRS”) formed to hold a portion of the FL3 CLO Securitization and FL4 CLO Securitization (as defined below), including a portion that generated excess inclusion income. Additionally, the Company wholly owns ACRC WM Tenant LLC, a TRS initially formed to lease from an affiliate a hotel property classified as real estate owned acquired on March 8, 2019, which was sold on March 1, 2022.
The income tax provision for the Company and the TRSs consisted of the following for the years ended December 31, 2025, 2024 and 2023 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | For the Years Ended December 31, |
| | | | | | | | | | 2025 | | 2024 | | 2023 |
| Current | | | | | | | | | | $ | 282 | | | $ | (5) | | | $ | 34 | |
| Deferred | | | | | | | | | | 3 | | | (13) | | | — | |
| Excise tax | | | | | | | | | | — | | | — | | | (73) | |
| Total income tax expense (benefit), including excise tax | | | | | | | | | | $ | 285 | | | $ | (18) | | | $ | (39) | |
For the years ended December 31, 2025 and 2024, the Company did not incur any expense for U.S. federal excise tax. For the year ended December 31, 2023, the Company accrued a benefit of $73 thousand for U.S. federal excise tax. Excise tax represents a 4% tax on the sum of a portion of the Company’s ordinary income and net capital gains not distributed during the calendar year (including any distribution declared in the fourth quarter and paid the following January) plus any prior year shortfall. If it is determined that an excise tax liability exists for the current tax year, the Company will accrue excise tax on estimated excess taxable income as such taxable income is earned. The annual expense is calculated in accordance with applicable tax regulations.
The TRSs recognize interest and penalties related to unrecognized tax benefits within income tax expense in the Company’s consolidated statements of operations. Accrued interest and penalties, if any, are included within other liabilities in the Company’s consolidated balance sheets.
As of December 31, 2025, tax years 2022 through 2025 remain subject to examination by taxing authorities. The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.