Advanced Flower Capital Inc.AFCG
Advanced Flower Capital Inc. Income Taxes Disclosure
INCOME TAX
A TRS is an entity taxed as a corporation that has not elected to be taxed as a REIT, in which a REIT directly or indirectly holds equity, and that has made a joint election with such REIT to be treated as a TRS. A TRS generally may engage in any business, including investing in assets and engaging in activities that could not be held or conducted directly by the Company without jeopardizing its qualification as a REIT. A TRS is subject to applicable United States federal, state and local income tax on its taxable income. In addition, as a REIT, the Company also may be subject to a 100% excise tax on certain transactions between it and its TRS that are not conducted on an arm’s-length basis. The income tax provision is included in the line item income tax expense, including excise tax.
The income tax (benefit) provision for the Company was approximately $(0.6) million and $0.4 million for the years ended December 31, 2025 and 2024, respectively. The income tax benefit/expense for the years ended December 31, 2025 and 2024 primarily related to activities of the Company’s taxable REIT subsidiary.
The income tax provision for the Company and TRS1 consisted of the following for the years ended December 31, 2025 and 2024:
| Years ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Current: | |||||||||||
| Federal | $ | 134,461 | $ | 868,300 | |||||||
State(a) | 12,669 | 298,894 | |||||||||
| Total current income tax expense (benefit) | 147,130 | 1,167,194 | |||||||||
| Total deferred income tax expense (benefit) | (648,844) | (711,653) | |||||||||
| Excise tax | (111,665) | (7,954) | |||||||||
| Total income tax expense (benefit), including excise tax | $ | (613,379) | $ | 447,587 | |||||||
(a) State taxes from Arizona, Florida, Maryland, Missouri and New Jersey make up more than 50% of this category.
For the years ended December 31, 2025 and 2024, the Company did not incur United States federal excise tax expense. During the year ended December 31, 2025, the Company received a partial refund of previously paid excise tax relating to the 2023 tax year. 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 period. If it is determined that an excise tax liability exists for the current period, the Company will accrue excise tax on estimated excess taxable income as such taxable income is earned. The expense is calculated in accordance with applicable tax regulations.
The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months. As of December 31, 2025, tax years 2022-2025 remain subject to examination by taxing authorities.
We applied ASU 2023-09 on a retrospective basis as discussed in Note 2. Accordingly, the disaggregation of rate reconciliation categories in the table below provide the disclosures required by ASU 2023-09 for the years ended December 31, 2025 and 2024. Income tax (benefit) expense for the years ended December 31, 2025 and 2024 differed from
the amounts computed by applying the U.S. federal income tax rate of 21% to pre-tax income as a result of the following:
Year ended December 31, 2025 | Year ended December 31, 2024 | ||||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||
| U.S. federal statutory tax rate | $ | (4,470,229) | 21.0 | $ | 3,005,042 | 21.0 | |||||||||||||||||
| State and local income taxes, net of federal income tax effect | 12,669 | (0.1) | 298,894 | 2.1 | |||||||||||||||||||
| REIT income not subject to corporate income tax | (2,219,849) | 10.4 | (2,136,742) | (14.9) | |||||||||||||||||||
| Nontaxable items temporary differences | 6,175,695 | (29.0) | (711,653) | (5.0) | |||||||||||||||||||
| Federal excise tax | (111,665) | 0.5 | (7,954) | (0.1) | |||||||||||||||||||
| Effective tax rate | $ | (613,379) | 2.9 | $ | 447,587 | 3.1 | |||||||||||||||||
The primary difference between the Company’s statutory rate and effective tax rate is largely determined by the amount of income subject to tax by the Company’s taxable REIT subsidiary. The Company expects that its future effective tax rate will be determined in a similar manner.
The federal statutory rate was 21% for the years ended December 31, 2025 and 2024. The primary difference between the Company’s statutory rate and effective tax rate is largely determined by the amount of income subject to tax by the Company’s taxable REIT subsidiary. The Company expects that its future effective tax rate will be determined in a similar manner.
As of December 31, 2025 and 2024, the Company’s deferred tax assets were $1.4 million and $0.7 million, respectively, and are included in prepaid expenses and other assets in the Company’s consolidated balance sheets. The Company believes it is more likely than not that the deferred tax assets will be realized in the future. Realization of the deferred tax assets is dependent upon the Company’s generation of sufficient taxable income in future years in appropriate tax jurisdictions to benefit from the reversal of temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.
The Company recorded deferred tax assets related to temporary differences on the fair value adjustments of the unrealized losses of loans held in the TRS and CECL allowance on loans held in the TRS. There were no valuation allowances for deferred tax assets during the years ended December 31, 2025 and 2024.
We applied ASU 2023-09 on a retrospective basis as discussed in Note 2. Accordingly, the income taxes paid by jurisdiction (net of refunds received) in the table below provide the disclosures required by ASU 2023-09 for the years ended December 31, 2025 and 2024:
| Years ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
Income taxes paid, net of refunds: | |||||||||||
| Federal | $ | 250,000 | $ | 868,300 | |||||||
| Arizona | 50,100 | 83,050 | |||||||||
| Florida | 15,000 | 51,500 | |||||||||
| Other U.S. States | 27,525 | 139,917 | |||||||||
| Federal excise | (131,501) | 124,733 | |||||||||
| Income taxes paid (net of refunds received) during the period | $ | 211,124 | $ | 1,267,500 | |||||||
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 4, 2026 | Showing above |
| 2024 | Mar 13, 2025 | |
| 2023 | Mar 7, 2024 | |
| 2022 | Mar 7, 2023 | |
| 2021 | Mar 10, 2022 | |
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.