Income Taxes
As a REIT, we are permitted to own lodging properties but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we enter into leases for each of our lodging properties with TRS lessees. The TRS lessees in turn contract with independent hotel management companies that manage day-to-day operations of our hotels under the oversight of the Subadvisor.
The components of our income tax provision for the periods presented are as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal | |
| | |
| | |
|
Current | $ | 2,004 |
| | $ | 2,383 |
| | $ | 5,363 |
|
Deferred | (2,010 | ) | | 451 |
| | (384 | ) |
| (6 | ) | | 2,834 |
| | 4,979 |
|
| | | | | |
State and Local | | | | | |
Current | 382 |
| | 801 |
| | 1,835 |
|
Deferred | (400 | ) | | 26 |
| | (47 | ) |
| (18 | ) | | 827 |
| | 1,788 |
|
Total (Benefit) Provision | $ | (24 | ) | | $ | 3,661 |
| | $ | 6,767 |
|
Deferred income taxes at December 31, 2017 and 2016 consist of the following (in thousands):
|
| | | | | | | |
| At December 31, |
| 2017 | | 2016 |
Deferred Tax Assets | | | |
Net operating loss carryforwards | $ | 4,918 |
| | $ | 5,725 |
|
Interest expense limitation | 1,203 |
| | 275 |
|
Accrued vacation payable and deferred rent | 1,148 |
| | 1,740 |
|
Deferred revenue — key money | 304 |
| | 537 |
|
Gift card liability | 243 |
| | 361 |
|
Other | 1,145 |
| | 661 |
|
Total deferred income taxes | 8,961 |
| | 9,299 |
|
Valuation allowance | (4,359 | ) | | (4,909 | ) |
Total deferred tax assets | 4,602 |
| | 4,390 |
|
Deferred Tax Liabilities | | | |
Villa rental management agreement | (5,387 | ) | | (7,240 | ) |
Other | (193 | ) | | (257 | ) |
Total deferred tax liabilities | (5,580 | ) | | (7,497 | ) |
Net Deferred Tax Liability | $ | (978 | ) | | $ | (3,107 | ) |
A reconciliation of the provision for income taxes with the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the periods presented is as follows (in thousands):
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | 2015 |
Pre-tax (loss) income from taxable subsidiaries | $ | (4,443 | ) | | $ | 4,764 |
| | $ | 16,033 |
|
| | | | | |
Federal provision at statutory tax rate | $ | (1,555 | ) | | $ | 1,668 |
| | $ | 5,612 |
|
Revaluation of deferred taxes due to Tax Cuts and Jobs Act (a) | 1,506 |
| | — |
| | — |
|
Disposition of hotels | 739 |
| | — |
| | — |
|
Valuation allowance | (550 | ) | | 2,526 |
| | 1,108 |
|
State and local taxes, net of federal benefit | (385 | ) | | 534 |
| | 1,023 |
|
Non-deductible expenses | 124 |
| | 102 |
| | 123 |
|
Loss (income) not subject to federal tax | 11 |
| | (1,239 | ) | | (1,244 | ) |
Other | 86 |
| | 70 |
| | 145 |
|
Total (benefit) provision | $ | (24 | ) | | $ | 3,661 |
| | $ | 6,767 |
|
___________
| |
(a) | The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, lowered the U.S. corporate income tax rate from 35% to 21%. This amount reflects the net impact of the Tax Cuts and Jobs Act on our domestic TRSs. |
The utilization of net operating losses may be subject to certain limitations under the tax laws of the relevant jurisdiction. If not utilized, our federal and state and local net operating losses will begin to expire in 2028. As of December 31, 2017 and 2016, we recorded a valuation allowance of $4.4 million and $4.9 million, respectively, related to these net operating loss carryforwards and other deferred tax assets.
The net deferred tax liability in the table above is comprised of deferred tax asset balances, net of certain deferred tax liabilities and valuation allowances, of $1.9 million and $2.1 million at December 31, 2017 and 2016, respectively, which are included in Other assets, net in the consolidated balance sheets, and other deferred tax liability balances of $2.9 million and $5.2 million at December 31, 2017 and 2016, respectively, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated balance sheets.
Our taxable subsidiaries recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands):
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
Beginning balance | $ | 4 |
| | $ | 684 |
|
Addition (deduction) based on tax positions related to prior years | 5 |
| | (680 | ) |
Ending balance | $ | 9 |
| | $ | 4 |
|
At December 31, 2017, we had unrecognized tax benefits as presented in the table above that, if recognized, would have a favorable impact on our effective income tax rate in future periods. We recognize interest and penalties related to uncertain tax positions in income tax expense. At December 31, 2017, we had accrued interest related to uncertain tax positions of less than $0.1 million.
Our tax returns are subject to audit by taxing authorities. The statute of limitations varies by jurisdiction and ranges from three to four years. Such audits can often take years to complete and settle. The tax years 2014 through 2016 remain open to examination by the major taxing jurisdictions to which we are subject.