LaSalle Hotel Properties

Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1998. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its shareholders. It is the Company’s current intention to adhere to these requirements and maintain the Company’s qualification for taxation as a REIT. As a REIT, the Company generally is not subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through a TRS is subject to federal, state and local income taxes. As a wholly owned TRS of the Company, LHL is required to pay income taxes at the applicable federal, state and local rates.

For federal income tax purposes, the cash distributions paid to the Company’s common shareholders of beneficial interest and preferred shareholders may be characterized as ordinary income, return of capital (generally non-taxable) or capital gains. Tax law permits certain characterization of distributions which could result in differences between cash basis and tax basis distribution amounts.

The following characterizes distributions paid per common share of beneficial interest and preferred share on a tax basis for the years ended December 31, 2017, 2016 and 2015:



	2017				2016				2015
	$		%		$		%		$		%
Common shares of beneficial interest
Ordinary income	$	0.9794	54.41	%	$	1.1631	62.26	%	$	1.6570	100.00	%
Capital gain	0.3627		20.15	%	0.4550		24.36	%	0.0000		0.00	%
Unrecaptured Section 1250 gain	0.4579		25.44	%	0.2499		13.38	%	0.0000		0.00	%
	$	1.8000	100.00	%	$	1.8680	100.00	%	$	1.6570	100.00	%

Preferred shares (Series H) ⁽¹⁾
Ordinary income	$	0.3089	54.41	%	$	1.4593	62.26	%	$	1.8750	100.00	%
Capital gain	0.1144		20.15	%	0.5709		24.36	%	0.0000		0.00	%
Unrecaptured Section 1250 gain	0.1444		25.44	%	0.3136		13.38	%	0.0000		0.00	%
	$	0.5677	100.00	%	$	2.3438	100.00	%	$	1.8750	100.00	%

Preferred shares (Series I)
Ordinary income	$	0.8672	54.41	%	$	1.2404	62.26	%	$	1.5938	100.00	%
Capital gain	0.3211		20.15	%	0.4853		24.36	%	0.0000		0.00	%
Unrecaptured Section 1250 gain	0.4055		25.44	%	0.2665		13.38	%	0.0000		0.00	%
	$	1.5938	100.00	%	$	1.9922	100.00	%	$	1.5938	100.00	%

Preferred shares (Series J) ⁽²⁾
Ordinary income	$	0.8570	54.41	%	$	0.6265	62.26	%	$	0.0000	0.00	%
Capital gain	0.3173		20.15	%	0.2451		24.36	%	0.0000		0.00	%
Unrecaptured Section 1250 gain	0.4007		25.44	%	0.1346		13.38	%	0.0000		0.00	%
	$	1.5750	100.00	%	$	1.0062	100.00	%	$	0.0000	0.00	%

⁽¹⁾On May 4, 2017, the Company redeemed the Series H Preferred Shares (see Note 6).

⁽²⁾On May 25, 2016, the Company issued the Series J Preferred Shares (see Note 6).

The Company’s federal and state tax returns for the year ended December 31, 2017 have not been filed. The taxability information presented for the Company’s dividends paid in 2017 is based upon management’s estimate.

Income tax expense (benefit) was comprised of the following for the years ended December 31, 2017, 2016 and 2015:



	For the year ended December 31,
	2017		2016		2015
LHL’s income tax expense (benefit)	$	983	$	4,491	$	(2,546	)
Operating Partnership’s income tax expense	716		1,293		1,254
Total income tax expense (benefit)	$	1,699	$	5,784	$	(1,292	)

The components of LHL’s income tax expense (benefit) and income (loss) before income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 were as follows:



	For the year ended December 31,
	2017			2016		2015
LHL’s income tax expense (benefit):
Federal
Current	$	1,162		$	1,490	$	(510	)
Deferred	(365		)	1,901		(1,251		)
State & local
Current	420			516		83
Deferred	(234		)	584		(868		)
Total	$	983		$	4,491	$	(2,546	)

LHL’s income (loss) before income tax expense (benefit)	$	3,563		$	10,255	$	(4,876	)

LHL’s provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to LHL’s pretax income (loss) for the years ended December 31, 2017, 2016 and 2015 as a result of the following differences:



	For the year ended December 31,
	2017			2016		2015
“Expected” federal tax expense (benefit) at statutory rate	$	1,211		$	3,487	$	(1,658	)
State income tax expense (benefit), net of federal income tax effect	262			776		(443		)
Other, net	(490		)	228		(445		)
Income tax expense (benefit)	$	983		$	4,491	$	(2,546	)

LHL’s deferred tax assets (liabilities) as of December 31, 2017 and 2016 were as follows:



	December 31,
	2017			2016
Net operating loss carryforwards	$	2,136		$	1,902
Bad debt reserves ⁽¹⁾	122			260
Golf membership deferred revenue ⁽¹⁾	0			(347		)
Straight-line rent ⁽¹⁾	(578		)	(734		)
Net deferred tax assets	$	1,680		$	1,081


⁽¹⁾	Amounts included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

As of December 31, 2017, the Company had net deferred tax assets of $1,680 primarily due to temporary federal differences and current and past years’ state tax net operating losses. These loss carryforwards will generally expire in 2018 through 2035 if not utilized by then. The Company analyzes state loss carryforwards on a state by state basis and records a valuation allowance when management deems it more likely than not that future results will not generate sufficient taxable income in the respective state to realize the deferred tax asset prior to the expiration of the loss carryforwards. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets related to state loss carryforwards prior to the expiration of the loss carryforwards and has determined that no valuation allowance is necessary. From time to time, the Company may be subject to federal, state or local tax audits in the normal course of business.

Regarding accounting for uncertainty in income taxes, GAAP guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the previously unrecognized benefit associated with the position is recognized in the financial statements. This guidance applies to all positions related to income taxes.

The Company has no material unrecognized income tax benefits as of December 31, 2017 and 2016. As of December 31, 2017, the tax years that remain subject to examination by major tax jurisdictions generally include 2013 through 2017.

The recently enacted tax reform bill, informally known as the Tax Cuts and Jobs Act, made significant changes to the U.S. federal income tax laws. For example, the top corporate income tax rate was reduced to 21%, and the corporate alternative minimum tax was repealed. Additionally, for taxable years beginning after December 31, 2017, the Tax Cuts and Jobs Act limits interest deductions for businesses, whether in corporate or pass-through form, to the sum of the taxpayer’s business interest income for the tax year and 30% of the taxpayer’s adjusted taxable income for the tax year, but the tax rules do permit a real estate business, such as a REIT, to elect out of the interest limitation rules in exchange for depreciating its real estate assets using alternative depreciation system principles. Technical corrections or other amendments to, or administrative guidance interpreting, the Tax Cuts and Job Act may be forthcoming at any time. We cannot predict the long-term effect of the Tax Cuts and Jobs Act or any future changes on REITs and their shareholders. For the Company, the reduction in the federal corporate income tax rate resulted in a change to the net deferred tax assets of the TRS, with a minimal impact to the current year federal income tax expense.