FEDERAL INCOME TAXES
Federal income taxes are not provided because we intend to and believe we qualify as a REIT under the provisions of the Code and because we have distributed and intend to continue to distribute all of our taxable income to our shareholders. Our shareholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate investment trust taxable income to our shareholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates.
Income earned by our taxable REIT subsidiary, Whitestone Davenport TRS LLC (“Davenport TRS”), is subject to federal income tax. For the year ended December 31, 2016, we recognized $45,000 in income tax expense related to Davenport TRS taxable year. Davenport TRS was dissolved in the fourth quarter of 2016.
Taxable income differs from net income for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue.
For federal income tax purposes, the cash distributions to shareholders are characterized as follows for the years ended December 31:
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| | 2017 | | 2016 | | 2015 |
Ordinary income (unaudited) | | 15.3 | % | | 49.0 | % | | 60.9 | % |
Return of capital (unaudited) | | 84.7 | % | | 33.7 | % | | 37.7 | % |
Capital gain distributions (unaudited) | | — | % | | 17.3 | % | | 1.4 | % |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |