INCOME TAXES
The Company has elected to be taxed as a REIT under the Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to annually distribute to its shareholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains. The Company intends to continue to adhere to these requirements and to maintain its REIT status. As a REIT, the Company is entitled to a deduction for some or all of the distributions it pays to shareholders. Accordingly, the Company is generally subject to U.S. federal income taxes on any taxable income that is not currently distributed to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to U.S. federal income taxes and may not be able to qualify as a REIT until the fifth subsequent taxable year.
Notwithstanding the Company’s qualification as a REIT, the Company may be subject to certain state and local taxes on its income or properties. In addition, the Company’s consolidated financial statements include the operations of one wholly-owned subsidiary that has jointly elected to be treated as a TRS and is subject to U.S. federal, state and local income taxes at regular corporate tax rates. The Company did not record any income tax expense related to the TRS for the years ended December 31, 2017, 2016 and 2015. As a REIT, the Company may also be subject to certain U.S. federal excise taxes if it engages in certain types of transactions.
Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which these temporary differences are expected to reverse. Deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including future reversal of existing taxable temporary differences, the magnitude and timing of future projected taxable income and tax planning strategies. The Company believes that it is not more likely than not that its net deferred tax asset will be realized in future periods and therefore, has recorded a valuation allowance for the balance, resulting in no effect on the consolidated financial statements.
The Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
| | | | | | | | |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Basis difference in properties | | $ | 2 |
| | $ | — |
|
Capital loss carryforward | | 5,751 |
| | 9,628 |
|
Net operating loss carryforward | | 6,125 |
| | 10,677 |
|
Other | | 469 |
| | 870 |
|
Gross deferred tax assets | | 12,347 |
| | 21,175 |
|
Less: valuation allowance | | (12,347 | ) | | (21,175 | ) |
Total deferred tax assets | | — |
| | — |
|
Deferred tax liabilities: | | | | |
Other | | — |
| | — |
|
Net deferred tax assets | | $ | — |
| | $ | — |
|
The Company’s deferred tax assets and liabilities result from the activities of the TRS. As of December 31, 2017, the TRS had a capital loss carryforward and a federal net operating loss carryforward of $27,385 and $29,169, respectively, which if not utilized, will begin to expire in 2019 and 2031, respectively.
Differences between net income from the consolidated statements of operations and other comprehensive income and the Company’s taxable income primarily relate to the recognition of sales of investment properties, impairment charges recorded on investment properties and the timing of both revenue recognition and investment property depreciation and amortization.
The following table reconciles the Company’s net income to REIT taxable income before the dividends paid deduction for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Net income attributable to the Company | | $ | 251,491 |
| | $ | 166,817 |
| | $ | 125,096 |
|
Book/tax differences | | (59,220 | ) | | (50,950 | ) | | 2,344 |
|
REIT taxable income subject to 90% dividend requirement | | $ | 192,271 |
| | $ | 115,867 |
| | $ | 127,440 |
|
The Company’s dividends paid deduction for the years ended December 31, 2017, 2016 and 2015 is summarized below:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Distributions | | $ | 192,271 |
| | $ | 166,285 |
| | $ | 166,064 |
|
Less: non-dividend distributions | | — |
| | (50,418 | ) | | (38,624 | ) |
Total dividends paid deduction attributable to earnings and profits | | $ | 192,271 |
| | $ | 115,867 |
| | $ | 127,440 |
|
A summary of the tax characterization per share of the distributions to shareholders of the Company’s preferred stock and common stock for the years ended December 31, 2017, 2016 and 2015 follows:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Preferred stock | | | | | | |
Ordinary dividends | | $ | 1.62 |
| | $ | 1.75 |
| | $ | 1.75 |
|
Non-dividend distributions | | — |
| | — |
| | — |
|
Capital gain distributions | | 0.07 |
| | — |
| | — |
|
Total distributions per share | | $ | 1.69 |
| | $ | 1.75 |
| | $ | 1.75 |
|
| | | | | | |
Common stock | | | | | | |
Ordinary dividends | | $ | 0.76 |
| | $ | 0.45 |
| | $ | 0.50 |
|
Non-dividend distributions | | — |
| | 0.21 |
| | 0.16 |
|
Capital gain distributions | | 0.03 |
| | — |
| | — |
|
Total distributions per share | | $ | 0.79 |
| | $ | 0.66 |
| | $ | 0.66 |
|
The Company records a benefit for uncertain income tax positions if the result of a tax position meets a “more likely than not” recognition threshold. No liabilities have been recorded as of December 31, 2017 or 2016 as a result of this provision. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2017. Returns for the calendar years 2014 through 2017 remain subject to examination by federal and various state tax jurisdictions.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the “Tax Cuts and Jobs Act” (TCJA). The TCJA makes broad and complex changes to the Code and establishes new tax laws that include, but are not limited to, the following: (i) reduction of the U.S. federal corporate tax rate; (ii) elimination of the corporate alternative minimum tax; (iii) limitation on deductible interest expense in certain circumstances; (iv) limitations on the deductibility of certain executive compensation; and (v) limitations on the use of net operating loss deductions. The changes made to the Code as a result of the TCJA will be applicable to the Company’s tax filings for tax years beginning after December 31, 2017. The Company has completed its accounting for the income tax effects under the TCJA that are relevant to the Company and required to be recorded and disclosed pursuant to FASB ASC 740, Income Taxes, using estimates based on reasonable and supportable assumptions and available inputs and underlying information as of the reporting date. The Company considers its accounting as of December 31, 2017 final relative to the enactment of the TCJA and there are no provisional amounts.