11. Income Taxes
The Company accounts for TRS income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The analysis utilized by the Company in determining the deferred tax valuation allowance involves considerable management judgment and assumptions.
The provision for income taxes differs from the amounts of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income from continuing operations as a result of the following differences (in thousands). The income tax benefit for the year ended December 31, 2016 includes an income tax benefit of $0.9 million due to contributions of certain investments in real estate from the REIT to certain TRS during the year.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||||||||||
|
Statutory federal income tax provision |
$ | 6,253 | 34.0 | % | $ | 13,505 | 34.0 | % | $ | 10,372 | 34.0 | % | ||||||||||||
|
Adjustment for nontaxable income |
(6,635 | ) | -36.1 | % | (11,468 | ) | -28.9 | % | (8,150 | ) | -26.7 | % | ||||||||||||
|
State income taxes, net of federal income tax benefit |
126 | 0.7 | % | 390 | 1.0 | % | 370 | 1.2 | % | |||||||||||||||
|
Contributions to TRS |
(942 | ) | -5.1 | % | - | - | % | - | - | % | ||||||||||||||
|
Other |
- | - | % | (18 | ) | - | % | 150 | 0.5 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total income tax (benefit) expense |
($ | 1,198 | ) | -6.5 | % | $ | 2,409 | 6.1 | % | $ | 2,742 | 9.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The components of the Company’s income tax (benefit) expense from continuing operations for the years ended December 31, 2016, 2015, and 2014 were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
|
Income tax (benefit) expense: |
||||||||||||
|
Current: |
||||||||||||
|
Federal |
$ | 3,353 | $ | 1,887 | $ | 2,254 | ||||||
|
State |
728 | 568 | 571 | |||||||||
|
Deferred: |
||||||||||||
|
Federal |
(4,822 | ) | (42 | ) | (75 | ) | ||||||
|
State |
(457 | ) | (4 | ) | (8 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total |
($ | 1,198 | ) | $ | 2,409 | $ | 2,742 | |||||
|
|
|
|
|
|
|
|||||||
The components of the consolidated TRS’s net deferred tax assets and liabilities as of December 31, 2016 and 2015 were as follows (in thousands):
| December 31, | ||||||||
| 2016 | 2015 | |||||||
|
Deferred tax assets: |
||||||||
|
Accrued expenses and other |
$ | 585 | $ | 623 | ||||
|
Prepaid expenses and other |
21 | 9 | ||||||
|
Investment in real estate book-tax basis difference |
4,641 | - | ||||||
|
Goodwill book-tax basis difference |
804 | - | ||||||
|
Net operating loss carryforward |
935 | 935 | ||||||
|
|
|
|
|
|||||
|
Total deferred tax assets before valuation allowances |
6,986 | 1,567 | ||||||
|
Valuation allowances |
(935 | ) | (935 | ) | ||||
|
|
|
|
|
|||||
|
Deferred tax assets |
$ | 6,051 | $ | 632 | ||||
|
|
|
|
|
|||||
|
Deferred tax liabilities: |
||||||||
|
Goodwill book-tax basis differences |
$ | 145 | $ | - | ||||
|
|
|
|
|
|||||
|
Deferred tax liabilities |
$ | 145 | $ | - | ||||
|
|
|
|
|
|||||
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The $0.9 million valuation allowance recorded at both December 31, 2016 and 2015 is for net operating loss (“NOL”) carryforwards where it is not considered more likely than not that the NOL carryforwards will be realized prior to expiration. The NOL carryforwards will begin to expire in 2034. Based on tax planning strategies and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not that the remaining deferred tax assets will be realized.
A position taken or expected to be taken by the Company in a tax return is recognized, or derecognized, in the consolidated financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of December 31, 2016, the Company does not have any uncertain tax positions. The Company’s policy for interest and penalties, if any, on uncertain tax positions recognized in the consolidated financial statements is to classify these as interest expense and operating expense, respectively.
The Company conducts business and files tax returns in the United States and numerous states and local jurisdictions. The Company’s tax years are generally open after 2012.