INCOME TAXES
For federal income tax purposes, distributions to stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. Nondividend distributions will reduce U.S stockholders’ basis (but not below zero) in their shares. The following table shows the character of the distributions the Company paid on a percentage basis for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | |
| | Year Ended December 31, |
Character of Distributions: | | 2017 | | 2016 | | 2015(1) |
Ordinary dividends | | — | % | | — | % | | — | % |
Nondividend distributions | | 100 | % | | 100 | % | | — | % |
Total | | 100 | % | | 100 | % | | — | % |
| |
(1) | The Company paid no distributions during the year ended December 31, 2015. |
During the year ended December 31, 2017, the Company distributed as dividends to its stockholders 100% of its taxable income for federal income tax purposes. Accordingly, no provision for federal income taxes related to such taxable income was recorded in the Company’s consolidated financial statements. During the year ended December 31, 2017, the Company incurred state and local income and franchise taxes of $2,500, which was recorded in general and administrative expenses on the consolidated statement of operations.
For its taxable year ended December 31, 2016, the Company was taxed as a C corporation under the Internal Revenue Code, as it did not meet all of the criteria to qualify as a REIT during this period. As such, the Company was subject to regular corporate income taxes on its taxable income for such period. The Company uses the asset and liability method of accounting for income taxes. Under this method, tax return positions are recognized in the consolidated financial statements when they are “more-likely-than-not” to be sustained upon examination by the taxing authority. Deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future periods. A valuation allowance may be placed on deferred income tax assets, if it is determined that it is more likely than not that a deferred tax asset may not be realized.
The Company did not pay any income tax for the taxable year ended December 31, 2016 because it incurred a net operating loss for such year. However, the income tax benefit from such net operating loss was offset by a full valuation allowance of approximately $496,000 against the net deferred tax assets as of December 31, 2016 because the Company intended to qualify as a REIT for the taxable years ending on or after December 31, 2017, and did not expect to utilize its net operating loss carryforward. The net change in the total valuation allowance was an increase of approximately $496,000 for the year ended December 31, 2016. As a result, no provision or benefit for income taxes was recognized in the accompanying financial statements.
The Company calculated its estimated annualized effective tax expense rate at 0% for the year ended December 31, 2016. The Company had no income tax expense or benefit for the years ended December 31, 2015 as it did not commence material operations until 2016. Deferred tax assets (liabilities) consisted of the following components as of the periods indicated: |
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2016 | | 2015 |
Fixed assets | | | $ | 337,888 |
| | $ | — |
|
Net operating loss | | | 109,072 |
| | — |
|
Deferred rent | | | 72,948 |
| | — |
|
Other | | | (23,561 | ) | | — |
|
Valuation allowance | | | (496,347 | ) | | — |
|
Total net deferred tax asset | | | $ | — |
| | $ | — |
|
The following is a reconciliation of benefit from income taxes with the amount computed by applying the statutory federal income tax rate to loss before income taxes for the periods indicated: |
| | | | | | | | |
| | |
| | 2016 | | 2015 |
Net loss | | $ | (1,392,279 | ) | | $ | — |
|
| | | | |
Federal provision (benefit) at statutory rate | | (487,297 | ) | | — |
|
State and local provision at statutory rate | | (9,050 | ) | | — |
|
Change in valuation allowance against net deferred tax assets | | 496,347 |
| | — |
|
Total benefit from income taxes | | $ | — |
| | $ | — |
|
As of December 31, 2016, the Company had federal net operating loss carryforwards of approximately $303,000 and $306,000. As the Company does not expect to utilize its net operating loss carryforwards, a full valuation allowance was placed against the deferred tax assets related to these carryforwards.
The Company had no unrecognized tax benefits as of or during the year ended December 31, 2017, 2016 and 2015. Any interest and penalties related to unrecognized tax benefits would be recognized within the provision for income taxes in the Company’s consolidated statements of operations. The Company files income tax returns in the U.S. federal jurisdiction, as well as various state and local jurisdictions, and is subject to routine examinations by the respective tax authorities.
In December 2017, the Tax Cuts and Jobs Act was signed into law which, in addition to reducing corporate and individual tax rates, eliminates or restricts various deductions. The Tax Cuts and Jobs Act makes numerous large and small changes to the tax rules that do not affect the Company’s REIT qualification rules directly.