HMG COURTLAND PROPERTIES INC

10.	INCOME TAXES

The Company as a qualifying real estate investment trust (“REIT”) distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back.

Distributed capital gains on sales of real estate as they relate to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax.

As previously reported, in January 2017 and 2016, the Company paid a cash dividend of approximately $501,000 and $517,000 (or $.50 per share) to shareholders of record as of December 29, 2016 and December 31, 2015, respectively. The dividends were a return of capital to shareholders. No dividends were declared for the year ended December 31, 2017.

As of December 31, 2017, the Company, excluding its taxable REIT subsidiary, CII, has an estimated tax net operating loss carryover (NOL) estimated at $1.4 million.

The Company’s 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT’s income tax return.

The Company accounts for income taxes in accordance with ASC Topic 740, “Accounting for Income Taxes”. ASC Topic 740 requires a Company to use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of December 31, 2017, and 2016, the Company has a net deferred tax liability of approximately $84,000 and $76,000, respectively, as a result of timing differences associated with the carrying value of the investment in affiliate (TGIF) and other investments. CII’s NOL carryover to 2018 is estimated at $989,000 and is fully reserved due to due to CII historically having tax losses.

The components of income before income taxes and the effect of adjustments to tax computed at the federal statutory rate for the years ended December 31, 2017 and 2016 were as follows:

	2017		2016
Loss before income taxes	$	(294,000)	$	(538,000)
Computed tax at federal statutory rate of 34%	$	(100,000)	$	(183,000)
State taxes		9,000		(16,000)
REIT related adjustments		152,000		199,000
Adjustment to valuation allowance		(152,000)		(149,000)
Revaluation of deferred items due to federal rate change		85,000		-
Other items, net		17,000		37,000
Provision for (benefit from) income taxes	$	11,000	$	(112,000)

The REIT related adjustments represent the difference between estimated taxes on undistributed income and/or capital gains and book taxes computed on the REIT’s income before income taxes, including tax on prohibited REIT income.

The provision for (benefit from) income taxes in the consolidated statements of comprehensive income consists of the following:

Year ended December 31,	2016		2017
Current:
Federal	$	(2,000)	$	28,000
State		5,000		-
		3,000		28,000
Deferred:
Federal	$	168,000	$	9,000
State		8,000		-
		176,000		9,000
Reduced valuation allowance		(168,000)		(149,000)
Total	$	11,000	$	(112,000)

As of December 31, 2017, and 2016, the components of the deferred tax assets and liabilities are as follows:

	As of December 31, 2017 Deferred tax				As of December 31, 2016 Deferred tax
	Assets		Liabilities		Assets		Liabilities
Net operating loss carry forward	$	223,000			$	391,000
Excess of book basis of 49% owned corporation over tax basis			$	281,000			$	393,000
Unrealized gain on marketable securities		-		50,000		-		22,000
Excess of tax basis over book basis of other investments		247,000		-		339,000		-
Valuation allowance		(223,000)				(391,000)
Totals	$	247,000	$	331,000	$	339,000	$	415,000