INCOME TAXES
The Company has elected to qualify as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended, commencing with the filing of our tax return for the 2015 fiscal year for the tax year ended December 31, 2015. Under those sections, a REIT that distributes at least 90% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. As a REIT, we generally will not be subject to federal income taxes, provided that we distribute 100% of taxable income. It is our intention to adhere to the organizational and operational requirements to maintain our REIT status. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax, which, for corporations, was repealed for tax years beginning after December 31, 2017 by the TCJA) and may not be able to qualify as a REIT for the four subsequent taxable years.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Effective January 1, 2018, for businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. Since UE has elected to qualify as a REIT under sections 856-860 of the Internal Revenue Code with intent to distribute 100% of its taxable income and did not have any activities in a Taxable REIT Subsidiary (“TRS”) prior to January 1, 2018, there is no impact to the Company’s financial statements.
As of December 31, 2017, the Company elected, for tax purposes, to treat the wholly-owned limited partnership that holds its Allentown property as a taxable REIT subsidiary (“TRS”). A TRS is a corporation, other than a REIT, in which we directly or indirectly hold stock, which has made a joint election with us to be treated as a TRS under Section 856(l) of the Code. A TRS is required to pay regular U.S. federal income tax, and state and local income tax where applicable, as a non-REIT “C” corporation. As a result, all future taxable income recognized by the TRS, including capital gains on the sale of the property held in the TRS, will be subject to a corporate level tax.
The Allentown legal entity restructuring resulted in a capital gain recognized for tax purposes in 2017. Consequently, the Company has determined that $0.37 of the $0.88 dividends distributed to shareholders in 2017 represented long-term capital gains. The Company’s 2018 consolidated financial statements will reflect the TRS’ federal and state corporate income taxes associated with the operating activities at its Allentown property until the expected sale date in the first quarter.
The following summarizes the tax status of dividends paid for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Dividend paid per share | $ | 0.88 |
| | $ | 0.82 |
| | $ | 0.80 |
|
Ordinary income | 58 | % | | 100 | % | | 100 | % |
Return of capital | — | % | | — | % | | — | % |
Capital gains | 42 | % | | — | % | | — | % |
The REIT and the other minority members are partners in the Operating Partnership. As such, the partners are required to report their share of taxable income on their tax returns. We are also subject to certain other taxes, including state and local taxes and franchise taxes which are included in general and administrative expenses in the consolidated and combined statements of income.
Our two Puerto Rico malls are subject to a 29% non-resident withholding tax which is included in income tax benefit (expense) in the consolidated and combined statements of income. The Puerto Rico tax benefit recorded was $0.3 million for the years ended December 31, 2017. During the years ended December 31, 2016 and 2015, $0.8 million and $1.3 million of Puerto Rico tax expense was recognized, respectively. Both properties are held in a special partnership for Puerto Rico tax reporting (the general partner being a qualified REIT subsidiary or “QRS”).
Income tax (benefit) expense consists of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2015 |
Income tax expense: | | | | | |
Current(1) | $ | 696 |
| | $ | 609 |
| | $ | 1,417 |
|
Deferred | (974 | ) | | 195 |
| | (123 | ) |
Total income tax (benefit) expense | $ | (278 | ) | | $ | 804 |
| | $ | 1,294 |
|
(1) Current income tax expense for the year ended December 31, 2016 is net of a $0.6 million reduction to the accrued income tax liability recorded in the second quarter of 2016.
A net deferred tax liability of $2.8 million is included in our consolidated balance sheet within Other liabilities as of December 31, 2017, comprised of temporary differences related to our two Puerto Rico properties, a deferred tax liability of $4.2 million offset by a deferred tax asset of $1.4 million. The deferred tax liability of $4.2 million is comprised of $2.2 million of tax depreciation in excess of GAAP depreciation, $1.7 million straight-line rents and $0.3 million of amortization of acquired leases not recorded for tax purposes. The deferred tax asset of $1.4 million is comprised of $0.5 million of insurance receivables recorded for tax purposes, $0.2 million of amortization of deferred financing fees not recorded for tax purposes and $0.7 million excess of bad debt expense for tax purposes.
The temporary differences resulting from activity during the years ended December 31, 2017, 2016, and 2015 is recorded within Income tax expense on the consolidated and combined statements of income.
Below is a table summarizing the net deferred income tax liability balance as of December 31, 2017 and 2016:
|
| | | |
(Amounts in thousands) | |
Balance at January 1, 2016 | $ | (3,607 | ) |
Change in deferred tax assets: | |
Depreciation | (94 | ) |
Amortization of deferred financing costs | (46 | ) |
Provision for doubtful accounts | (14 | ) |
Change in deferred tax liabilities: | |
Depreciation | (88 | ) |
Straight-line rent | 39 |
|
Amortization of acquired leases | 8 |
|
Balance at December 31, 2016 | (3,802 | ) |
Change in deferred tax assets: | |
Depreciation | (312 | ) |
Amortization of deferred financing costs | (46 | ) |
Provision for doubtful accounts | 514 |
|
Insurance claims receivable | 501 |
|
Change in deferred tax liabilities: | |
Depreciation | 102 |
|
Straight-line rent | 207 |
|
Amortization of acquired leases | 8 |
|
Balance at December 31, 2017 | $ | (2,828 | ) |
The Operating Partnership is organized as limited partnership and is generally not subject to federal income tax. Accordingly, no provision for federal income taxes has been reflected in the accompanying consolidated and combined financial statements. The Operating Partnership, however, is subject to the non-resident withholding tax at our two Puerto Rico malls.