9. Income Taxes

 

The Company has elected to be taxed as a REIT under the Code. As a REIT, the Company generally will not be subject to corporate level federal income taxes on net income it distributes to its stockholders. The Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company may also be subject to federal and/or state income taxes when using net operating loss carryforwards to offset current taxable income.

 

The Company leases its hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of the Income Taxes Topic of the FASB ASC, which requires the Company to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases.

 

In 2017, the Company fully released the $13.6 million valuation allowance primarily related to its federal and state net operating loss carryforwards as the Company determined it was more likely than not that these net deferred tax assets will be realized. The decision to release the valuation allowance was made after management considered all available evidence, both positive and negative, including but not limited to, historical operating results, cumulative income in recent years and forecasted earnings. The income tax benefit caused by the release of the valuation allowance was partially offset as the Company recognized a $4.4 million charge to income tax expense due to the use of net operating losses in the fourth quarter, and a write-down in the value of its net deferred tax assets as of December 31, 2017 as a result of the Tax Cuts and Jobs Act, which lowered the corporate tax rates from a maximum of 35% to a flat rate of 21% effective for tax years beginning after December 31, 2017. In addition, during 2017, the Company recognized combined federal and state income tax expense of $1.4 million, based on 2017 projected taxable income net of operating loss carryforwards for its taxable entities.

 

During 2016, the Company reversed a $1.5 million income tax accrual that it had previously recorded during 2013, plus $0.1 million in accrued interest, through the 2016 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset as the Company recognized combined federal and state income tax expense of $1.0 million based on 2016 projected taxable income net of operating loss carryforwards for its taxable entities.

 

During 2015, the Company recognized combined federal and state income tax expense of $0.7 million related to its sale of BuyEfficient, and $0.7 million based on 2015 projected taxable income net of operating loss carryforwards for its taxable entities. In addition, upon the sale of the preferred equity investment and settlement of the working capital loan associated with the Rochester Portfolio (see Note 4), the Company recorded $0.1 million in income tax expense, which is included in discontinued operations, net of tax in the Company’s consolidated statements of operations.

 

The Company recognizes penalties and interest related to unrecognized tax benefits in income tax expense. During 2017, the Company did not recognize any penalties or interest related to unrecognized tax benefits in income tax expense. During 2016 and 2015, the Company recognized $42,000 and $55,000 in interest expense related to its tax provisions, respectively.

 

The income tax benefit (provision) for the Company is included in the consolidated financial statements as follows (in thousands):

 

 

Reconciliations of the Company’s tax provision at the U.S. statutory rate to the benefit (provision) for income taxes, net were as follows (in thousands):

 

 

The significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 

 

As noted above, the Company released its valuation allowance in 2017 as it currently believes that there no longer exists sufficient negative evidence that would prevent it from relying on projections of future taxable income sufficient to realize its deferred tax assets. The Company, however, provided a valuation allowance against its net deferred tax assets at December 31, 2016 and 2015 due to the uncertainty at the time of realizing the Company’s historical operating losses. Accordingly, no provision or benefit for deferred income taxes related to the Company is reflected in the accompanying consolidated statements of operations for either 2016 or 2015.

 

At December 31, 2017 and 2016, the net operating loss carryforwards for federal income tax purposes totaled approximately $15.6 million and $27.1 million, respectively. These losses, which begin to expire in 2031, are available to offset future income through 2032.

 

Characterization of Distributions

 

For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. For the years ended December 31, 2017, 2016 and 2015, distributions paid per share were characterized as follows (unaudited):