Income Taxes
As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.
Based on the Company's analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of December 31, 2017. The Company files U.S. federal and state income tax returns. As of December 31, 2017, U.S. federal tax returns filed by the Company for 2016, 2015 and 2014 and state tax returns filed for 2016, 2015, 2014 and 2013 are open for examination pursuant to relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company's policy is to classify them as a component of its provision for income taxes.
Income Tax Provision
Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more TRS. Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. For the years ended December 31, 2017 and December 31, 2016, the Company recorded a federal and state tax provision of approximately $3.5 million and approximately $3.2 million, respectively. In addition, on completion and filing of its 2015 federal and state tax returns in September 2016 for the TRS, the Company incurred an additional tax liability of approximately $2.0 million due to changes in the estimated taxable income from certain investments, which is recorded in "Income tax provision (benefit)" in the Consolidated Statements of Operations for the year ended December 31, 2016.
The following table summarizes the Company's income tax provision for the years ended December 31, 2017 and December 31, 2016 (dollars in thousands):
|
| | | | | | | | |
| | For the year ended December 31, 2017 | | For the year ended December 31, 2016 |
Current tax provision (benefit) | | | | |
Federal | | $ | 4,076 |
| | $ | 2,365 |
|
State | | (267 | ) | | 672 |
|
Interest and Penalties | | — |
| | 119 |
|
Total Current Provision for Income taxes, net | | 3,809 |
| | 3,156 |
|
Deferred Provision (Benefit) for Income Taxes | | | | |
Federal | | 85 |
| | — |
|
State | | (407 | ) | | — |
|
Total Deferred Benefit for Income Taxes, net | | (322 | ) | | — |
|
Total Income Tax Provision, net | | $ | 3,487 |
| | $ | 3,156 |
|
Deferred Tax Asset and Deferred Tax Liability
As of December 31, 2017, the Company recorded a deferred tax asset of approximately $6.1 million relating to capital loss carryforward and temporary differences as a result of the timing of income recognition of certain investments held in the TRS. The capital loss carryforwards and temporary differences may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance.
In addition, the REIT generated net operating losses related to its swap terminations and for the California return a portion of the NOL's is apportioned to the TRS. The Company recorded a deferred state tax asset of $8.8 million in the REIT and $765 thousand in the TRS. The TRS can carryback the NOL's to each of the two preceding years and receive a refund for taxes paid. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized with the exception of the TRS carryback to 2015 and has recorded a combined valuation allowance of $9.2 million. The Company also recorded a deferred federal tax liability of $85 thousand in anticipation of the receipt of the state tax refund as a result of the carryback of the California NOL.
The following tables disclose the components of the Company's deferred tax asset and deferred tax liability at December 31, 2017 and 2016 (dollars in thousands):
|
| | | | | | | | |
Deferred Tax Asset | | December 31, 2017 | | December 31, 2016 |
Net operating loss available for carry-back and carry-forward | | $ | 9,604 |
| | $ | — |
|
Net capital loss carry-forward | | 4,158 |
| | 1,981 |
|
Investments | | 1,948 |
| | 4,504 |
|
Deferred tax asset | | 15,710 |
| | 6,485 |
|
Allowance | | (15,303 | ) | | (6,485 | ) |
Net deferred tax asset | | $ | 407 |
| | $ | — |
|
|
| | | | | | | | |
Deferred Tax Liability | | December 31, 2017 | | December 31, 2016 |
Net operating loss available for carry-back and carry-forward | | $ | 85 |
| | $ | — |
|
Net deferred tax liability | | $ | 85 |
| | $ | — |
|
Reconciliation of Tax Rate to Effective Tax Rate
The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to the deduction of dividends distributions to be paid under Code Section 857(a). The reconciliation of these rates are as follows:
|
| | | | | | |
| | For the year ended December 31, 2017 | | For the year ended December 31, 2016 |
Federal statutory rate | | 34.3 | % | | 34.0 | % |
State statutory rate, net of federal benefit | | (1.3 | )% | | 3.0 | % |
Other | | (1.0 | )% | | (9.5 | )% |
Change in valuation allowance | | 0.8 | % | | (15.4 | )% |
Effect of statutory rate changes | | 2.9 | % | | — | % |
REIT earnings not subject to corporate taxes | | (31.8 | )% | | (26.5 | )% |
Effective Tax Rate | | 3.9 | % | | (14.4 | )% |
Excise Tax
For the years ended December 31, 2017 and December 31, 2016, the Company recorded excise tax expense of $0 and $339 thousand, respectively. Excise tax represents a four percent tax on the required amount of the Company’s ordinary income and net capital gains not distributed during the year. The expense is calculated in accordance with applicable tax regulations.
Tax Cuts and Jobs Act
On December 15, 2017, a House of Representatives and Senate Conference Committee released a unified version of the Tax Cuts and Jobs Act (the "TCJA"). This followed passage of the Tax Cuts and Jobs Act by the House of Representatives on November 16, 2017, and by the Senate on December 2, 2017. The Tax Cuts and Jobs Act would reform the individual income tax code by lowering tax rates on wages, investment, and business income; broadening the tax base; and simplifying the tax code. The plan would lower the corporate income tax rate to 21 percent. In addition, the alternative minimum tax was repealed net operating loss are limited to 80% of taxable income and a real estate business is not subject to the interest expense limitation upon making an irrevocable exemption election. The Company has made its best estimate on how TCJA will impact its existing deferred tax balances.