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 provision for the Company was approximately $0.4 million and $1.7 million for the years ended December 31, 2024 and 2023, respectively. The income tax expense for the years ended December 31, 2024 and 2023 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, 2024 and 2023:
| | | | | | | | | | | |
| Years ended
December 31, |
| 2024 | | 2023 |
| Current: | | | |
| Federal | $ | 868,300 | | | $ | 1,239,878 | |
| State | 298,894 | | | 306,338 | |
| Total current income tax expense (benefit) | 1,167,194 | | | 1,546,216 | |
| Deferred: | | | |
| Federal | (711,653) | | | — | |
| State | — | | | — | |
| Total deferred income tax (benefit) expense | (711,653) | | | — | |
| Excise tax | (7,954) | | | 113,121 | |
| Total income tax expense (benefit), including excise tax | $ | 447,587 | | | $ | 1,659,337 | |
For the years ended December 31, 2024 and 2023, the Company incurred zero and $0.1 million for United States federal excise tax expense, respectively. 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.
The following table is a reconciliation of the income tax computed for continuing operations at the federal statutory rate of 21% for the years ended December 31, 2024 and 2023:
| | | | | | | | | | | |
| Years ended
December 31, |
| 2024 | | 2023 |
| U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % |
| State and local income taxes, net of federal income tax effect | 0.8 | % | | 0.7 | % |
| REIT income not subject to corporate income tax | (18.7) | % | | (18.4) | % |
| | | |
| Nontaxable items temporary differences | (1.9) | % | | 0.0 | % |
| Federal excise tax | 0.0 | % | | 0.2 | % |
| Effective tax rate | 1.2 | % | | 3.5 | % |
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, 2024 and 2023, the Company’s deferred tax assets were $0.7 million and zero, 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, 2024 and 2023.