(11) Income Taxes
Commencing January 1, 2014, the Company began operating as a REIT for U.S. income tax purposes. Since operating as a REIT, the Company filed, and intends to continue to file, as a REIT, and its TRSs filed, and intend to continue to file, as C corporations. The Company also files tax returns in various states and countries. The Company’s state tax returns reflect different combinations of the Company’s subsidiaries and are dependent on the connection each subsidiary has with a particular state. The following information pertains to the Company’s income taxes on a consolidated basis.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law, making significant changes to the Internal Revenue Code. As a result of the TCJA, a tax benefit of $3,372 and $466 has been recorded to current tax expense and deferred tax expense, respectively, for the year ended December 31, 2017.
Income tax expense (benefit) consists of the following:
|
|
|
Current |
|
|
Deferred |
|
|
Total |
|
|||
|
Year ended December 31, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
4,174 |
|
|
$ |
359 |
|
|
$ |
4,533 |
|
|
State and local |
|
|
2,706 |
|
|
|
(170 |
) |
|
|
2,536 |
|
|
Foreign |
|
|
1,546 |
|
|
|
615 |
|
|
|
2,161 |
|
|
|
|
$ |
8,426 |
|
|
$ |
804 |
|
|
$ |
9,230 |
|
|
Year ended December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
9,518 |
|
|
$ |
(935 |
) |
|
$ |
8,583 |
|
|
State and local |
|
|
2,681 |
|
|
|
(6 |
) |
|
|
2,675 |
|
|
Foreign |
|
|
1,500 |
|
|
|
598 |
|
|
|
2,098 |
|
|
|
|
$ |
13,699 |
|
|
$ |
(343 |
) |
|
$ |
13,356 |
|
|
Year ended December 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
7,686 |
|
|
$ |
(930 |
) |
|
$ |
6,756 |
|
|
State and local |
|
|
1,746 |
|
|
|
(246 |
) |
|
|
1,500 |
|
|
Foreign |
|
|
1,527 |
|
|
|
12,275 |
|
|
|
13,802 |
|
|
|
|
$ |
10,959 |
|
|
$ |
11,099 |
|
|
$ |
22,058 |
|
As of December 31, 2017 and 2016, the Company had income taxes receivable (payable) of $3,106 and $(747), respectively.
The U.S. and foreign components of earnings before income taxes are as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. |
|
$ |
332,607 |
|
|
$ |
313,429 |
|
|
$ |
282,774 |
|
|
Foreign |
|
|
(5,701 |
) |
|
|
(1,264 |
) |
|
|
1,854 |
|
|
Total |
|
$ |
326,906 |
|
|
$ |
312,165 |
|
|
$ |
284,628 |
|
A reconciliation of significant differences between the reported amount of income tax expense and the expected amount of income tax expense that would result from applying the U.S. federal statutory income tax rate of 35 percent to income before taxes is as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income tax expense at U.S. federal statutory rate |
|
$ |
114,417 |
|
|
$ |
109,257 |
|
|
$ |
99,620 |
|
|
Tax adjustment related to REIT(a) |
|
|
(109,294 |
) |
|
|
(101,868 |
) |
|
|
(92,073 |
) |
|
State and local income taxes, net of federal income tax benefit |
|
|
1,193 |
|
|
|
1,481 |
|
|
|
1,180 |
|
|
Book expenses not deductible for tax purposes |
|
|
2,635 |
|
|
|
2,465 |
|
|
|
2,117 |
|
|
Stock-based compensation |
|
|
(121 |
) |
|
|
169 |
|
|
|
66 |
|
|
Valuation allowance(b) |
|
|
3,953 |
|
|
|
2,340 |
|
|
|
13,818 |
|
|
Rate change(c) |
|
|
(466 |
) |
|
|
(19 |
) |
|
|
90 |
|
|
Undistributed earnings of foreign subsidiaries(d) |
|
|
1,363 |
|
|
|
— |
|
|
|
— |
|
|
Minimum tax credit refundable(e) |
|
|
(4,108 |
) |
|
|
— |
|
|
|
— |
|
|
Other differences, net(f) |
|
|
(342 |
) |
|
|
(469 |
) |
|
|
(2,760 |
) |
|
Income tax expense |
|
$ |
9,230 |
|
|
$ |
13,356 |
|
|
$ |
22,058 |
|
|
(a) |
Includes dividend paid deduction of $110,442, $102,888 and $83,730 for the tax years ended December 31, 2017, 2016 and 2015, respectively. |
|
(b) |
In May of 2015, Puerto Rico’s “Act 72 of 2015” was signed into law. Under the enacted legislation, significant changes to the 2011 Internal Revenue Code rendered the Company’s tax planning strategy to provide a source of taxable income to support recognition of deferred tax assets in Puerto Rico no longer feasible. As a result, for the years ended December 31, 2017, 2016 and 2015, a non-cash valuation allowance of $3,953, $2,340 and $13,818, respectively, was recorded to income tax expense due to our limited ability to utilize the Puerto Rico deferred tax assets in future years. |
|
(c) |
Under the TCJA, the U.S. corporate income tax rate was lowered from 35% to 21%. As a result, a non-cash benefit of $466 to income tax expense was recorded for the reduction of the U.S. net deferred tax liability. |
|
(d) |
In prior periods, the undistributed earnings of our Canadian subsidiaries were designated as permanently reinvested. As of December 31, 2017, however, management did not assert that the undistributed earnings of our Canadian subsidiaries will be permanently reinvested. During the current year, we recognized a deferred tax charge of $1,363 for future foreign withholding taxes related to undistributed earnings. |
|
(e) |
Under the TCJA, the corporate alternative minimum tax was repealed and any minimum tax carryforwards not utilized become fully refundable in 2021. The Company does not expect to utilize its minimum tax credit carryforward. As a result, a cash benefit of $4,108 to income tax expense was recorded. |
|
(f) |
Upon enactment, the TCJA includes a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, net of foreign tax credits. As a result, a cash charge of $736 to income tax expense was recorded. |
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and (liabilities) are presented below:
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
709 |
|
|
$ |
551 |
|
|
Accrued liabilities not deducted for tax purposes |
|
|
3,648 |
|
|
|
4,574 |
|
|
Asset retirement obligation |
|
|
124 |
|
|
|
116 |
|
|
Net operating loss carry forwards |
|
|
18,617 |
|
|
|
14,835 |
|
|
Tax credit carry forwards |
|
|
153 |
|
|
|
153 |
|
|
Charitable contributions carry forward |
|
|
7 |
|
|
|
6 |
|
|
Property, plant and equipment |
|
|
2,300 |
|
|
|
1,424 |
|
|
Investment in partnerships |
|
|
240 |
|
|
|
320 |
|
|
Gross deferred tax assets |
|
|
25,798 |
|
|
|
21,979 |
|
|
Less: valuation allowance |
|
|
(20,120 |
) |
|
|
(16,167 |
) |
|
Net deferred tax assets |
|
|
5,678 |
|
|
|
5,812 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangibles |
|
|
(5,199 |
) |
|
|
— |
|
|
Undistributed earnings of foreign subsidiaries |
|
|
(1,363 |
) |
|
|
(6,091 |
) |
|
Gross deferred tax liabilities |
|
|
(6,562 |
) |
|
|
(6,091 |
) |
|
Net deferred tax liabilities |
|
$ |
(884 |
) |
|
$ |
(279 |
) |
As of December 31, 2017, we have approximately $229,118 of U.S. net operating loss carry forwards to offset future taxable income. There is no Internal Revenue Code §382 limitation. These carry forwards expire between 2029 through 2032. In addition, we have $4,799 of various credits available to offset future U.S. federal income tax. Under the TCJA, the corporate alternative minimum tax was repealed and any minimum tax credit carryforwards not utilized become fully refundable in 2021. We do not expect to utilize our minimum tax credit of $4,108 before 2021.
As of December 31, 2017 we have approximately $649,401 of state net operating loss carry forwards before valuation allowances. These state net operating losses are available to reduce future taxable income and expire at various times and amounts. In addition, we have $211 of various credits available to offset future state income tax. There was no valuation allowance related to state net operating loss carry forwards as of December 31, 2017 and 2016. There were no net changes in the total state valuation allowance for the years ended December 31, 2017 and 2016.
During 2017, we generated $9,568 of Puerto Rico net operating losses. As of December 31, 2017, we had approximately $45,748 of Puerto Rico net operating loss carry forwards before valuation allowances. These Puerto Rico net operating losses are available to offset future taxable income. These carry forwards expire between 2018 and 2027. In addition, we have $153 of alternative minimum tax credits available to offset future Puerto Rico income tax.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those jurisdictions during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income, and tax-planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income before the expiration of the carry forwards governed by the tax code. Based on the current level of pretax earnings and significant changes in Puerto Rico tax legislation, the Company will not generate the minimum amount of future taxable income to support the realization of the deferred tax assets. As a result, management has determined that a valuation allowance related to Puerto Rico net operating loss carry forwards and other deferred tax assets is necessary. The valuation allowance for these deferred tax assets as of December 31, 2017 and 2016 was $20,120 and $16,167, respectively. The net change in the total valuation allowance for the years ended December 31, 2017 and 2016 was an increase of $3,953 and $2,340, respectively. The amount of the deferred tax asset considered realizable, however, could be adjusted in the near term if estimates of future taxable income during the carry forward period increase.
As of December 31, 2017, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $38,213, of which $29,018 is subject to the one-time transition tax on foreign earnings required by the TCJA or has otherwise been previously taxed. In prior periods, management considered these earning to be indefinitely reinvested outside of the U.S. As of December 31, 2017, management does not designate these earnings as permanently reinvested. We have recognized a deferred tax liability of approximately $1,363 related to foreign withholding taxes on these earnings.
Under ASC 740 Income Taxes, we provide for uncertain tax positions, and the related interest, and adjust recognized tax benefits and accrued interest accordingly. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
Balance as of December 31, 2015 |
|
$ |
— |
|
|
Additions for tax positions related to current year |
|
|
696 |
|
|
Additions for tax positions related to prior years |
|
|
76 |
|
|
Reductions for tax positions related to prior years |
|
|
— |
|
|
Lapse of statute of limitations |
|
|
— |
|
|
Settlements |
|
|
— |
|
|
Balance as of December 31, 2016 |
|
$ |
772 |
|
|
Additions for tax positions related to current year |
|
|
1,122 |
|
|
Additions for tax positions related to prior years |
|
|
173 |
|
|
Reductions for tax positions related to prior years |
|
|
— |
|
|
Lapse of statute of limitations |
|
|
— |
|
|
Settlements |
|
|
— |
|
|
Balance as of December 31, 2017 |
|
$ |
2,067 |
|
Included in the balance of unrecognized benefits at December 31, 2017 is $2,067 of tax benefits that, if recognized in future periods, would impact our effective tax rate. During the years ended December 31, 2017 and 2016, we recognized interest and penalties of $213 and $18, respectively, as a component of income tax expense in connection with our liabilities related to uncertain tax positions.
Within the next twelve months, we do not expect to decrease our unrecognized tax benefits as a result of the expiration of statute of limitations.
We are subject to income taxes in the U.S. and nearly all states. In addition, the Company is subject to income taxes in Canada and the Commonwealth of Puerto Rico. We are no longer subject to U.S federal income tax examinations by tax authorities for years prior to 2013, or for any U.S. state income tax audit prior to 2009. The Internal Revenue Service has completed a review of the 2013 income tax return. With respect to Canada and Puerto Rico, we are no longer subject to income tax audits for years before 2014 and 2013, respectively.