VENTAS INC

NOTE 13—INCOME TAXES

We have elected to be taxed as a REIT under the applicable provisions of the Code for every year beginning with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as TRS entities, which are subject to federal, state and foreign income taxes. All entities other than the TRS entities are collectively referred to as the “REIT” within this Note. Certain REIT entities are subject to foreign income tax.

Although we intend to continue to operate in a manner that will enable us to qualify as a REIT, such qualification depends upon our ability to meet, on a continuing basis, various distribution, stock ownership and other tests. During the years ended December 31, 2017, 2016 and 2015, our tax treatment of distributions per common share was as follows:



	2017		2016		2015
Tax treatment of distributions:
Ordinary income	$	1.02814	$	2.68216	$	3.02368
Qualified ordinary income	0.00337		0.05794		0.01632
Long-term capital gain	1.07836		0.11613		—
Unrecaptured Section 1250 gain	0.21513		0.10877		—
Distribution reported for 1099-DIV purposes	$	2.32500	$	2.96500	$	3.04000
Add: Dividend declared in current year and taxable in following year	0.79000		—		—
Distribution declared per common share outstanding	$	3.11500	$	2.96500	$	3.04000

We believe we have met the annual REIT distribution requirement by payment of at least 90% of our estimated taxable income for 2017, 2016 and 2015. Our consolidated benefit for income taxes for the years ended December 31, 2017, 2016 and 2015 was as follows:



	2017			2016			2015
	(In thousands)
Current - Federal	$	(5,672	)	$	(2,991	)	$	138
Current - State	1,119			1,241			1,453
Deferred - Federal	(54,396		)	(19,539		)	(25,962		)
Deferred - State	3,237			(3,634		)	(3,054		)
Current - Foreign	2,307			1,067			953
Deferred - Foreign	(6,394		)	(7,487		)	(12,812		)
Total	$	(59,799	)	$	(31,343	)	$	(39,284	)

The 2017 income tax benefit is primarily due to accounting for the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), specifically a $64.5 million benefit from the reduced U.S. federal corporate tax rate on net deferred tax liabilities and an offsetting expense of $23.3 million to establish a valuation allowance on deferred interest carryforwards, losses of certain TRS entities and the release of a tax reserve. The 2016 income tax benefit was due primarily to losses of certain TRS entities, the reversal of a net deferred tax liability at one TRS and the release of a tax reserve.

Although the TRS entities have paid minimal cash federal income taxes for the year ended December 31, 2017, their federal income tax liabilities may increase in future years as we exhaust net operating loss (“NOL”) carryforwards and as our senior living and other business segments grow. Such increases could be significant.

A reconciliation of income tax expense and benefit, which is computed by applying the federal corporate tax rate for the years ended December 31, 2017, 2016 and 2015, to the income tax benefit is as follows:



	2017			2016			2015
	(In thousands)
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interest and income taxes	$	204,742		$	181,478		$	123,086
State income taxes, net of federal benefit	(1,115		)	(1,022		)	(657		)
Increase in valuation allowance from ordinary operations	8,237			3,921			20,978
Decrease in ASC 740 income tax liability	(4,750		)	(3,582		)	(462		)
Tax at statutory rate on earnings not subject to federal income taxes	(231,379		)	(209,204		)	(185,648		)
Foreign rate differential and foreign taxes	6,407			2,094			3,095
Change in tax status of TRS	(690		)	(5,629		)	—
Effect of the 2017 Tax Act	(41,212		)	—			—
Other differences	(39		)	601			324
Income tax benefit	$	(59,799	)	$	(31,343	)	$	(39,284	)

Tax Cuts and Jobs Act of 2017

On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code. The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which we believe have the most significant impact on the Company’s federal income taxes are as follows:

The 2017 Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate. We have recorded a decrease related to TRS net deferred tax liabilities of $19.9 million and a decrease to the associated valuation allowances of $44.6 million, with a corresponding net adjustment to deferred income tax benefit of $64.5 million for the year ended December 31, 2017.

The 2017 Tax Act amended the interest expense limitation rules applicable to business entities. An election is available under the 2017 Tax Act to be excluded from the new interest limitation provision for “real property trade or businesses.” We have made a reasonable estimate that the new interest limitation rules may disallow the deferred interest carried forward under the rules prior to the 2017 Tax Act. Consequently, we have recorded a provisional adjustment of $23.3 million for the entire deferred tax asset related to the existing deferred interest carryforward. We will recognize any changes to provisional amounts as we continue to analyze the existing statute or as additional guidance becomes available. We expect to complete our analysis of the provisional amounts by the end of 2018.

The 2017 Tax Act requires a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company believes that no such tax will be due as there are no accumulated foreign earnings applicable to the mandatory deemed repatriation.

We did not identify items for which the income tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017. Our analysis of the 2017 Tax Act may be impacted by new legislation, the Congressional Joint Committee Staff, Treasury, or other guidance. Based on the 2017 Tax Act as enacted, we do not believe there will be further material impacts to the financial statements related to the other 2017 Tax Act provisions but cannot assure you as to the outcome of this matter.

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities at December 31, 2017, 2016 and 2015 are summarized as follows:



	2017			2016			2015
	(In thousands)
Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs	$	(300,395	)	$	(409,803	)	$	(413,566	)
Operating loss and interest deduction carryforwards	146,732			195,415			180,575
Expense accruals and other	12,890			18,185			14,624
Valuation allowance	(109,319		)	(120,438		)	(120,015		)
Net deferred tax liabilities	$	(250,092	)	$	(316,641	)	$	(338,382	)

We established beginning net deferred tax assets and liabilities related to temporary differences between the financial reporting and the tax bases of assets acquired and liabilities assumed (primarily property, intangible and related assets, net of NOL carryforwards), for the years ended December 31, 2017, 2016, and 2015, in connection with the following acquisitions:



	2017			2016			2015
	(In thousands)
2015 HCT acquisition	$	—		$	—		$	(32,336	)
2015 UK acquisition	—			—			(18,569		)
2016 Life Sciences Acquisition	19,262			(9,446		)	—
2017 miscellaneous acquisitions	(4,510		)	—			—
Established beginning deferred tax assets or liabilities	$	14,752		$	(9,446	)	$	(50,905	)

Our net deferred tax liability decreased $66.5 million during 2017 primarily due to accounting for the 2017 Tax Act, specifically a $64.5 million benefit from the reduced U.S. federal corporate tax rate on net deferred tax liabilities and an offsetting expense of $23.3 million to establish a provisional adjustment on deferred interest carryforwards, the impact of TRS operating losses, currency translation adjustments, and purchase accounting adjustments. Our net deferred tax liability decreased $21.7 million during 2016 primarily due to the reversal of a net deferred tax liability at one TRS and the impact of TRS operating losses and currency translation adjustments, offset by $9.4 million of recorded deferred tax liability as a result of the Life Sciences Acquisition.

Due to uncertainty regarding the realization of certain deferred tax assets, we have established valuation allowances, primarily in connection with the NOL carryforwards related to certain TRSs. The amounts related to NOLs at the TRS entities for 2017, 2016, and 2015 are $67.1 million, $84.7 million and $85.5 million, respectively.

A rollforward of valuation allowances, for the years ended December 31, 2017, 2016 and 2015, is as follows:



	2017			2016			2015
	(In thousands)
Beginning Balance	$	120,438		$	120,015		$	97,550
Additions:
Purchase accounting	—			—			1,002
Expenses⁽¹⁾	9,277			6,589			21,375
Subtractions:
Deductions⁽¹⁾	(1,040		)	(2,668		)	(397		)
Effect of the 2017 Tax Act	(21,321		)	—			—
State income tax, net of federal impact	956			536			529
Other activity (not resulting in expense or deduction)	1,009			(4,034		)	(44		)
Ending balance	$	109,319		$	120,438		$	120,015


⁽¹⁾	Generally, Expenses and Deductions are increases and decreases, respectively, in TRS valuation allowances, the latter being through utilization or release. The net amount equals the increase in valuation allowance on the reconciliation of income tax expense and benefit schedule above.

We are subject to corporate level taxes (“built-in gains tax”) for any asset dispositions during the five-year period immediately after the assets were owned by a C corporation (either prior to our REIT election, through stock acquisition or merger). The amount of income potentially subject to built-in gains tax is generally equal to the lesser of the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset or the actual amount of gain. Some, but not all, future gains could be offset by available NOL carryforwards.

At December 31, 2017, 2016 and 2015, the REIT had NOL carryforwards of $625.8 million, $1.1 billion and $1.1 billion, respectively. Additionally, the REIT has $14.4 million of federal income tax credits that were carried over from acquisitions. These amounts can be used to offset future taxable income (and/or taxable income for prior years if an audit determines that tax is owed), if any. The REIT will be entitled to utilize NOLs and tax credit carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid. Certain NOL and credit carryforwards are limited as to their utilization by Section 382 of the Code. The remaining REIT carryforwards begin to expire in 2024.

For the years ended December 31, 2017 and 2016, the net difference between tax bases and the reported amount of REIT assets and liabilities for federal income tax purposes was approximately $4.1 billion and $4.4 billion, respectively, less than the book bases of those assets and liabilities for financial reporting purposes.

Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the year ended December 31, 2014 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2013 and subsequent years. We are subject to audit generally under the statutes of limitation by the Canada Revenue Agency and provincial authorities with respect to the Canadian entities for the year ended December 31, 2013 and subsequent years. We are also subject to audit in Canada for periods subsequent to the acquisition, and certain prior periods, with respect to entities acquired in 2014 from Holiday Retirement. We are subject to audit in the United Kingdom generally for the periods ended in and subsequent to 2016.

The following table summarizes the activity related to our unrecognized tax benefits:



	2017			2016
	(In thousands)
Balance as of January 1	$	20,950		$	24,135
Additions to tax positions related to prior years	648			222
Subtractions to tax positions related to prior years	(497		)	—
Subtractions to tax positions as a result of the lapse of the statute of limitations	(4,336		)	(3,407		)
Balance as of December 31	$	16,765		$	20,950

Included in these unrecognized tax benefits of $16.8 million and $21.0 million at December 31, 2017 and 2016, respectively, were $15.0 million and $19.3 million of tax benefits at December 31, 2017 and 2016, respectively, that, if recognized, would reduce our annual effective tax rate. We accrued interest of $0.2 million related to the unrecognized tax benefits during 2017, but no penalties. We expect our unrecognized tax benefits to decrease by $2.6 million during 2018, as a result of the lapse of the statute of limitations.

As a part of the transfer pricing structure in the normal course of business, the REIT enters into transactions with certain TRSs, such as leasing transactions, other capital financing and allocation of general and administrative costs, which transactions are intended to comply with Internal Revenue Service and foreign tax authority transfer pricing rules.