12. Income Taxes
As a REIT, we must meet certain organizational and operational requirements, including the requirement to distribute at least 90% of our annual REIT taxable income excluding capital gains to our stockholders. As a REIT, we generally will not be subject to federal income tax to the extent we distribute our REIT taxable income to our stockholders and provided we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which our REIT qualification was lost. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.
During 2017, we paid cash distributions of $32.2 million to our stockholders, all of which is classified as a return of capital for tax purposes. For 2017, given that we incurred a taxable loss, no aggregate minimum distribution to stockholders was required to maintain our REIT status.
Our consolidated financial statements include the operations of our TRS, which is subject to federal, state and local income taxes on its taxable income. Our TRS has gross deferred tax assets of $48.0 million. From inception through December 31, 2017, the TRS operated at a cumulative taxable loss, which has resulted in these deferred tax assets being fully offset by a valuation allowance.
As of December 31, 2017 and 2016, we did not accrue interest or penalties associated with any unrecognized tax benefits during the years ended December 31, 2017 and 2016. We recorded nominal state and local tax expense along with nominal penalties and interest on income taxes for the year ended December 31, 2017 and 2016.
On February 16, 2017, the IRS opened an examination of the 2014 tax year of the TRS. On May 30, 2017, we received confirmation from the IRS that the examination of the TRS’ 2014 tax year was closed without any changes. Other than for the TRS’ 2014 tax year which is now closed (for federal purposes), our subsidiaries and we remain subject to tax examination for the period from January 1, 2014 to December 31, 2017. The Company and its subsidiaries file income tax returns in the U.S. and various state, local and foreign jurisdictions.
Impact of Tax Reform
The Tax Cuts & Jobs Act (the “TCJA”) was enacted on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings. However, the TCJA does not change the dividends paid deduction applicable to REITs; therefore, we generally will not be subject to federal income taxes on our REIT taxable income and gains that we distribute to our stockholders. At December 31, 2017, we have recorded, in accordance with ASC 740, the tax effects of enactment of the TCJA on existing deferred tax balances. As our deferred tax balances have a full valuation allowance, we recognized no tax expense from the TCJA. Further, as we do not have any non-U.S. operations, the one-time transition tax on foreign earnings is not applicable. Therefore, although management is still evaluating the effects of the TCJA, we do not believe that the TCJA will significantly impact our consolidated financial statements.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740, Income Taxes. Our financial results reflect the income tax effects of the TCJA for which the accounting under ASC Topic 740 is complete, and we have recorded provisional amounts for those specific income tax effects of the TCJA for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. We recorded an immaterial amount of tax expense for the impact of the re-measurement of our deferred tax inventory. We are still analyzing certain aspects of the TCJA and refining our calculations; therefore, these estimates may change as additional information becomes available.