Income Taxes
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities of the TRS entities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax liabilities: | | | |
Real estate and real estate partnership basis differences | $ | 32,032 |
| | $ | 72,726 |
|
Deferred tax assets: | | | |
Net operating, capital and other loss carryforwards | $ | 9,523 |
| | $ | 8,873 |
|
Accruals and expenses | 6,575 |
| | 7,537 |
|
Tax credit carryforwards | 73,450 |
| | 65,559 |
|
Management contracts and other | 200 |
| | 300 |
|
Total deferred tax assets | 89,748 |
| | 82,269 |
|
Valuation allowance | (25,489 | ) | | (4,467 | ) |
Net deferred tax assets | $ | 32,227 |
| | $ | 5,076 |
|
In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act, or the 2017 Act, which is effective for years beginning with 2018. The 2017 Act provides for a reduction in the federal income tax rate. In accordance with GAAP, we revalued our deferred tax assets and liabilities as of December 31, 2017. We have not completed our accounting for the tax effects of enactment of the 2017 Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances, resulting in our recognition of a net tax benefit of $15.9 million.
At December 31, 2017, we had federal and state net operating loss carryforwards, or NOLs, for which the deferred tax asset was approximately $9.5 million, before a valuation allowance of $6.6 million. The NOLs expire in years 2018 to 2033. Subject to certain separate return limitations, we may use these NOLs to offset a portion of state taxable income generated by our TRS entities.
As of December 31, 2017, we had low-income housing and rehabilitation tax credit carryforwards and corresponding deferred tax assets of approximately $73.5 million for income tax purposes that expire in years 2024 to 2037. In light of the lower federal tax rate under the 2017 Act, our TRS entities must generate more taxable income in future years to utilize tax credit carryforwards, which are recorded as deferred tax assets. As a result, during the year ended December 31, 2017, we recognized a partial valuation allowance of $15.4 million against the deferred tax assets associated with low-income housing and rehabilitation tax credit carryforwards.
At December 31, 2017, we had a real estate partnership basis difference of $4.4 million related to the 2017 impairment loss recognized related to the La Jolla Cove property discussed in Note 3, for which we have recognized a full valuation allowance.
A reconciliation of the beginning and ending balance of our unrecognized tax benefits is presented below (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Balance at January 1 | $ | 2,286 |
| | $ | 2,897 |
| | $ | 2,286 |
|
Additions (reductions) based on tax positions related to prior years | 190 |
| | (611 | ) | | 611 |
|
Balance at December 31 | $ | 2,476 |
| | $ | 2,286 |
| | $ | 2,897 |
|
Because the statute of limitations has not yet elapsed, our United States federal income tax returns for the year ended December 31, 2013 and subsequent years and certain of our State income tax returns for the year ended December 31, 2013 and subsequent years are currently subject to examination by the IRS or other taxing authorities. If recognized, the unrecognized benefit would affect the effective rate.
In 2014, the IRS initiated an audit of the Aimco Operating Partnership’s 2011 and 2012 tax years. This audit remains in process as of December 31, 2017. We do not believe the audit will have any material effect on our unrecognized tax benefits, financial condition or results of operations.
Our policy is to include any interest and penalties related to income taxes within the income tax line item in our consolidated statements of operations.
In accordance with the accounting requirements for stock-based compensation, we may recognize tax benefits in connection with the exercise of stock options by employees of our TRS entities and the vesting of restricted stock awards. As of December 31, 2017, all cumulative excess tax benefits from employee stock option exercises and vested restricted stock awards had been realized. As further discussed in the Accounting Pronouncements Adopted in the Current Year heading in Note 2, in 2017 we began recognizing the tax effects related to stock-based compensation through earnings in the period the compensation was recognized.
Significant components of the income tax benefit or expense are as follows and are classified within income tax benefit in income before gain on dispositions and gain on dispositions of real estate, net of tax, in our consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal (1) | $ | (938 | ) | | $ | 5,038 |
| | $ | 1,310 |
|
State | 525 |
| | 2,916 |
| | 1,357 |
|
Total current | (413 | ) | | 7,954 |
| | 2,667 |
|
| | | | | |
Deferred: | | | | | |
Federal | (10,908 | ) | | (26,173 | ) | | (27,382 | ) |
State | (3,621 | ) | | (623 | ) | | (1,052 | ) |
Revaluation of deferred taxes due to change in tax rate | (15,894 | ) | | — |
| | — |
|
Total deferred | (30,423 | ) | | (26,796 | ) | | (28,434 | ) |
Total benefit | $ | (30,836 | ) | | $ | (18,842 | ) | | $ | (25,767 | ) |
Classification: | | | | | |
Income before gain on dispositions | $ | (32,126 | ) | | $ | (25,208 | ) | | $ | (27,524 | ) |
Gain on dispositions of real estate | $ | 1,290 |
| | $ | 6,366 |
| | $ | 1,757 |
|
| |
(1) | As a result of the 2017 Act, Alternative Minimum Tax credits that are not used will be refunded before 2022, therefore in 2017 we reclassified $2.7 million in AMT credits from deferred tax assets to receivables, which is included in other assets on our consolidated balance sheet, resulting in a net current federal tax benefit. |
Consolidated income or loss subject to tax consists of pretax income or loss of our TRS entities and income and gains retained by the REIT. For the years ended December 31, 2017, 2016 and 2015, we had consolidated net loss subject to tax of $55.6 million, net income subject to tax of $109.3 million and net loss subject to tax of $31.3 million, respectively.
The reconciliation of income tax attributable to operations computed at the United States statutory rate to income tax benefit is shown below (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Tax (benefit) provision at United States statutory rates on consolidated income or loss subject to tax | $ | (19,459 | ) | | 35.0 | % | | $ | 38,257 |
| | 35.0 | % | | $ | (10,947 | ) | | 35.0 | % |
State income tax expense, net of federal tax (benefit) expense | (1,769 | ) | | 3.2 | % | | 7,152 |
| | 6.5 | % | | (361 | ) | | 1.2 | % |
Establishment of deferred tax asset related to partnership basis difference (1) | (3,501 | ) | | 6.3 | % | | — |
| | — | % | | — |
| | — | % |
Effect of permanent differences | (1,629 | ) | | 2.9 | % | | (132 | ) | | (0.1 | )% | | (27 | ) | | 0.1 | % |
Tax effect of intercompany transactions (2) | — |
| | — | % | | (47,369 | ) | | (43.3 | )% | | (1,515 | ) | | 4.8 | % |
Tax credits | (9,607 | ) | | 17.3 | % | | (16,750 | ) | | (15.3 | )% | | (13,583 | ) | | 43.4 | % |
Tax reform revaluation (3) | (15,894 | ) | | 28.6 | % | | — |
| | — | % | | — |
| | — | % |
Increase in valuation allowance (4) | 21,023 |
| | (37.8 | )% | | — |
| | — | % | | 666 |
| | (2.1 | )% |
Total income tax benefit | $ | (30,836 | ) | | 55.5 | % | | $ | (18,842 | ) | | (17.2 | )% | | $ | (25,767 | ) | | 82.4 | % |
| |
(1) | Includes the establishment of a deferred tax asset related to partnership basis difference when it became apparent that it would reverse in the foreseeable future. This deferred tax asset is fully reserved in the valuation allowance described below. |
| |
(2) | 2016 and 2015 include the effect of intercompany asset transfers between the Aimco Operating Partnership and TRS entities, for which tax was deferred and recognized as the assets affected GAAP income or loss, for example, through depreciation, impairment, or upon the sale of the asset to a third-party. Effective January 1, 2017, we adopted a new accounting standard applicable to intercompany asset transfers. As a result, the accumulated unrecognized deferred tax expense associated with historical intercompany transfers was recognized as a cumulative effect adjustment through retained earnings at that time, as further described in Note 2. |
| |
(3) | Reflects revaluation of deferred tax assets and liabilities using the TRS entities’ lower effective tax rates resulting from the 2017 Act. |
| |
(4) | Includes a $15.4 million valuation allowance against the deferred tax assets associated with rehabilitation tax credits due to the lower federal tax rate under the 2017 Act. |
Income taxes paid totaled approximately $7.4 million, $2.2 million and $2.0 million in the years ended December 31, 2017, 2016 and 2015, respectively.
For income tax purposes, dividends paid to holders of Common Stock primarily consist of ordinary income, capital gains, qualified dividends and unrecaptured Section 1250 gains, or a combination thereof. For the years ended December 31, 2017, 2016 and 2015, dividends per share held for the entire year were estimated to be taxable as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage |
Ordinary income | $ | 0.75 |
| | 51.5 | % | | $ | 0.45 |
| | 34.2 | % | | $ | 0.36 |
| | 30.2 | % |
Capital gains | 0.51 |
| | 35.7 | % | | 0.47 |
| | 35.4 | % | | 0.37 |
| | 31.3 | % |
Qualified dividends | 0.02 |
| | 1.6 | % | | 0.13 |
| | 9.9 | % | | 0.17 |
| | 14.5 | % |
Unrecaptured Section 1250 gain | 0.16 |
| | 11.2 | % | | 0.27 |
| | 20.5 | % | | 0.28 |
| | 24.0 | % |
| $ | 1.44 |
| | 100.0 | % | | $ | 1.32 |
| | 100.0 | % | | $ | 1.18 |
| | 100.0 | % |