Ellington Credit CoEARN
Ellington Credit Co Income Taxes Disclosure
Income Taxes
The Company revoked its prior REIT election, effective for the tax year beginning January 1, 2024, and operates as a taxable C-Corporation, subject to applicable U.S. federal, state, and local income tax.
Cash dividends declared by the Company that do not exceed its current or accumulated earnings and profits are considered ordinary income to shareholders for income tax purposes. Distributions in excess of the Company's current and accumulated earnings and profits are characterized as return of capital or are treated by shareholders as capital gains.
The following table details the estimated tax characteristics of the Company's dividends declared on its common stock for the three-month period ended March 31, 2025 and the years ended December 31, 2024 and 2023.
| Three-Month Period Ended March 31, 2025 | Year Ended December 31, | |||||||||||||||||||
| Tax Characteristic | 2024 | 2023 | ||||||||||||||||||
| Ordinary income | — | % | 24.1 | % | 38.0 | % | ||||||||||||||
| Return of capital | 100.0 | % | 75.9 | % | 62.0 | % | ||||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
Certain foreign and domestic subsidiaries of the Company are taxed as corporations for U.S. federal, state, and local income tax purposes. To the extent that those entities incur, or are expected to incur, U.S. federal, state, or local income taxes, or foreign income taxes, such tax expense is recognized by the Company.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, or "ASC 740" and has applied ASU 2023-09 on a prospective basis as discussed in Note 2. Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities under U.S. GAAP and the carrying amounts used for income tax purposes. For the three-month periods ended March 31, 2025 and 2024 and year ended December 31, 2024, the Company recorded an income tax expense (benefit) of $(6) thousand, $0.3 million, and $0.5 million, respectively. No such expense was recorded for the year ended December 31, 2023, during which time the Company was operating as a REIT and generally not subject to income tax.
The Company evaluates its deferred tax assets for recoverability using an approach which considers the relative impact of negative and positive evidence, including historical profitability and projections of future taxable income. As of March 31, 2025, there was an approximate increase of $2.2 million in the Company's deferred tax assets and the Company has recorded a valuation allowance of $13.3 million to fully reserve against its deferred tax assets.
The following table summarizes the Company's (benefit) provision for income tax for the period January 1, 2025 to March 31, 2025 and the year ended December 31, 2024. The Company did not record any provision for income tax for the year ended December 31, 2023.
| (In thousands) | Three-Month Period Ended March 31, 2025 | Year Ended December 31, 2024 | ||||||||||||
| Current provision for income tax | ||||||||||||||
| Federal | $ | — | $ | 238 | ||||||||||
| State | (6) | 272 | ||||||||||||
| Total current provision for income tax, net | (6) | 510 | ||||||||||||
| Deferred (benefit) provision for income tax | ||||||||||||||
| Federal | — | — | ||||||||||||
| State | — | — | ||||||||||||
| Total deferred (benefit) provision for income tax, net | — | — | ||||||||||||
| Total (benefit) provision for income tax | $ | (6) | $ | 510 | ||||||||||
The following table details the components of the Company's net deferred tax asset (liability) as of March 31, 2025 and December 31, 2024.
| (In thousands) | March 31, 2025 | December 31, 2024 | ||||||||||||
| Deferred tax asset | ||||||||||||||
Net operating loss available for carry-back and carry-forward(1) | $ | 13,333 | $ | 11,147 | ||||||||||
| Net capital loss carry-forward | — | — | ||||||||||||
| Basis difference for investments | — | — | ||||||||||||
| Valuation allowance | (13,333) | (11,147) | ||||||||||||
| Deferred tax asset | — | — | ||||||||||||
| Deferred tax liability | ||||||||||||||
| Basis difference for investments | — | — | ||||||||||||
| Valuation allowance | — | — | ||||||||||||
| Deferred tax liability | — | — | ||||||||||||
| Net deferred tax asset (liability), net of valuation allowance | $ | — | $ | — | ||||||||||
(1)Includes state net operating losses available for carry-back and carry-forward as of March 31, 2025 and December 31, 2024 of $3.3 million and $2.8 million, respectively. These deferred tax assets were fully offset by a valuation allowance.
The Company had a pre-tax U.S. federal net operating loss carryforward ("NOL Carryforward") of approximately $47.6 million and $39.8 million as of March 31, 2025 and December 31, 2024, respectively; such NOL Carryforward has an unlimited carryforward period.
The following table details the reconciliation between the Company's U.S. federal and state statutory income tax rate and the effective tax rate for the three-month period ended March 31, 2025.
| Three-Month Period Ended March 31, 2025 | ||||||||||||||
| (In thousands) | ||||||||||||||
| Federal statutory amount and rate | $ | (1,654) | 21.00 | % | ||||||||||
| State statutory amount and rate, net of federal benefit | ||||||||||||||
| CT | (467) | 5.93 | % | |||||||||||
| Other | (32) | 0.41 | % | |||||||||||
| Change in valuation allowance | 2,147 | (27.26) | % | |||||||||||
| Income tax expense (benefit) and Effective tax rate | $ | (6) | 0.07 | % | ||||||||||
The following table details the reconciliation between the Company's U.S. federal and state statutory income tax rate and the effective tax rate for the year ended December 31, 2024.
| Year Ended December 31, 2024 | ||||||||
| Federal statutory rate | 21.00 | % | ||||||
| State statutory rate, net of federal benefit | 6.34 | % | ||||||
| Change in valuation allowance | (20.15) | % | ||||||
| Effective tax rate | 7.19 | % | ||||||
The Company did not pay any income tax or receive any income tax refunds for either federal or state jurisdictions during the three-month period ended March 31, 2025.
Based on its analysis of any potential uncertain income tax positions, the Company concluded that it did not have any uncertain tax positions that meet the recognition or measurement criteria of ASC 740 as of March 31, 2025 or December 31, 2024 and 2023. Tax authorities in the relevant jurisdictions may select the Company's tax returns for audit and propose adjustments before the expiration of the statute of limitations. Tax returns filed for the Company's open tax years or any ongoing audits remain open to adjustment in the major tax jurisdictions.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Jun 23, 2025 | Showing above |
| 2024 | Mar 31, 2025 | |
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.