Income Taxes
We have elected to be taxed as a REIT pursuant to Section 856(c) of the Internal Revenue Code of 1986, as amended (“Code”). In order for us to qualify as a REIT, at least 95.0 percent of our gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute annually at least 90.0 percent of its REIT taxable income (calculated without any deduction for dividends paid and excluding capital gain) to its stockholders and meet other tests.
Qualification as a REIT involves the satisfaction of numerous requirements (on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation, which requires us continually to monitor our tax status. We analyzed the various REIT tests and confirmed that we continued to qualify as a REIT for the year ended December 31, 2017.
As a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on the ordinary taxable income we distribute to our stockholders as dividends. If we fail to qualify as a REIT in any taxable year, our taxable income could be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes as well as U.S. federal income and excise taxes on our undistributed income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries (“TRSs”) is subject to federal, state and local income taxes. The Company is also subject to income taxes in Canada as a result of the acquisition of Carefree in 2016. We do not provide for withholding taxes on our undistributed earnings from our Canadian subsidiaries as they are reinvested and will continue to be reinvested indefinitely outside the United States.
For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains, and return of capital. For the years ended December 31, 2017, 2016, and 2015, distributions paid per share were taxable as follows (unaudited / rounded):
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| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage |
Ordinary income | $ | 0.83 |
| | 31.2 | % | | $ | 0.81 |
| | 31.2 | % | | $ | 1.08 |
| | 41.7 | % |
Capital gain | — |
| | — | % | | 0.51 |
| | 19.6 | % | | 0.78 |
| | 30.1 | % |
Return of capital | 1.83 |
| | 68.8 | % | | 1.28 |
| | 49.2 | % | | 0.74 |
| | 28.2 | % |
Total distributions declared | $ | 2.66 |
| | 100.0 | % | | $ | 2.60 |
| | 100.0 | % | | $ | 2.60 |
| | 100.0 | % |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. Under the Tax Act, the corporate income tax rate is reduced from a maximum marginal rate of 35.0 percent to a flat 21.0 percent. In accordance with ASC 740, “Accounting for Income Taxes,” entities are required to recognize the effect of tax law changes in the period of enactment even though the effective date of most provisions of the Tax Act was January 1, 2018. Although the Staff Accounting Bulletin (“SAB”) No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” allows entities to record provisional amounts during a measurement period, it is our view that we have obtained the necessary information available to prepare and analyze (including computations) in reasonable detail the accounting for the change in tax law as noted below.
The components of our (benefit) / provision for income taxes attributable to continuing operations for the year ended December 31, 2017 and 2016 are as follows (amounts in thousands):
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| | | | | | | | |
| | Year Ended
December 31, 2017 | | Year Ended
December 31, 2016 |
Federal | | | | |
Current | | $ | (181 | ) | | $ | 187 |
|
State and Local | | | | |
Current | | 675 |
| | 438 |
|
Deferred | | (11 | ) | | — |
|
Foreign | | | | |
Current | | (48 | ) | | 58 |
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Deferred | | (571 | ) | | (400 | ) |
| |
|
|
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Total (Benefit) / Provision | | $ | (136 | ) | | $ | 283 |
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A reconciliation of the (benefit) / provision for income taxes with the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the year ended December 31, 2017 and 2016 is as follows (amounts in thousands):
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| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
Pre-tax loss attributable to taxable subsidiaries | | $ | (17,404 | ) | | | | $ | (11,157 | ) | | |
| | | | | | | | |
Federal provision / (benefit) at statutory tax rate (34%) | | (5,918 | ) | | 34.0 | % | | (3,794 | ) | | 34.0 | % |
State and local taxes, net of federal benefit | | (3 | ) | | — | % | | (183 | ) | | 1.6 | % |
Alternative minimum tax | | — |
| | — | % | | 93 |
| | (0.8 | )% |
Rate differential | | 318 |
| | (1.8 | )% | | 104 |
| | (0.9 | )% |
Change in valuation allowance | | (21,322 | ) | | 122.5 | % | | 4,021 |
| | (36.0 | )% |
Change in deferred tax asset | | 25,885 |
| | (148.7 | )% | | — |
| | — | % |
Others | | 360 |
| | (2.1 | )% | | (225 | ) | | 2.0 | % |
Tax (benefit) / provision - taxable subsidiaries | | (680 | ) | | 3.9 | % | | 16 |
| | (0.1 | )% |
Other state taxes - flow through subsidiaries | | 544 |
| | | | 267 |
| | |
Total (benefit) / provision | | $ | (136 | ) | | | | $ | 283 |
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Our deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. Our temporary differences primarily relate to net operating loss carryforwards, and with respect to our Canadian investments, depreciation and basis differences between tax and U.S. GAAP.
At December 31, 2017, we re-measured the deferred tax assets and liabilities of our U.S. TRSs to reflect the effect of the enacted change in the tax rate under the Tax Act. We have also considered the new tax rate in assessing the need for and change to our existing valuation allowance and adjusted accordingly. Since we have recorded a full valuation allowance against substantially all of our deferred tax assets related to the U.S. TRSs, no material impact on the net deferred tax asset and the provision for income taxes was noted.
The deferred tax assets and liabilities included in the consolidated balance sheets are comprised of the following tax effects of temporary differences and based on the Tax Act (amounts in thousands):
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| As of December 31, |
| 2017 | | 2016 |
Deferred Tax Assets | | | |
Net operating loss carryforwards | $ | 19,739 |
| | $ | 30,821 |
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Real estate assets | 23,523 |
| | 33,167 |
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Other | 1,272 |
| | 1,746 |
|
Gross deferred tax assets | 44,534 |
| | 65,734 |
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Valuation allowance | (41,932 | ) | | (63,862 | ) |
Net deferred tax assets | 2,602 |
| | 1,872 |
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| | | |
Deferred Tax Liabilities | | | |
Basis differences - foreign investment | (25,114 | ) | | (23,816 | ) |
Gross deferred tax liabilities | (25,114 | ) | | (23,816 | ) |
| | | |
Net Deferred Tax Liability (1) | $ | (22,512 | ) | | $ | (21,944 | ) |
(1) Net deferred tax liability is included within Other liabilities in our Consolidated Balance Sheets.
SHS had U.S. operating loss carryforwards of $81.0 million, or $17.1 million after tax, as of December 31, 2017. The loss carryforwards will begin to expire in 2021 through 2035 if not offset by future taxable income. In addition, our Canadian subsidiaries have operating loss carryforwards of $10.2 million, or $2.7 million after tax, as of December 31, 2017. The loss carryforwards will begin to expire in 2033 through 2038 if not offset by future taxable income.
We had no unrecognized tax benefits as of December 31, 2017 and 2016. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2017.
We classify certain state taxes as income taxes for financial reporting purposes. We recorded a provision for state income taxes of $0.7 million for the year ended December 31, 2017, $0.4 million for the year ended December 31, 2016, and $0.2 million for the year ended December 31, 2015.
As previously noted, certain of our subsidiaries are subject to income taxes in the U.S. and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require application of significant judgment. With few exceptions, we are no longer subject to U.S. federal, state and local, examinations by tax authorities for the tax years ended December 31, 2011 and prior. In addition, our Canadian subsidiaries are subject to taxes in Canada and in the province of Ontario. We are no longer subject to examination by the Canadian tax authorities for the tax years ended December 31, 2012 and prior.
Our policy is to report income tax penalties and income tax related interest expense as a component of income tax expense. No interest or penalty associated with any unrecognized income tax benefit or provision was accrued, nor was any income tax related interest or penalty recognized during the years ended December 31, 2017, 2016 and 2015.
SHS is currently under audit by the Internal Revenue Service for the tax year 2015.