Colony NorthStar, Inc.

Income Taxes

The Company is subject to income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local and non-U.S. jurisdictions, primarily in Europe. The Company's current primary sources of income subject to tax are income from loan resolutions in some of its loan portfolios, income from interests in asset management companies which manage some of its loan portfolios, hotel and healthcare operations from its real estate equity portfolio and fee income from its investment management business.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted, which provides for a reduction in the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. At December 31, 2017, the Company recognized a provisional amount of $24.9 million relating to the effects of the tax rate change on our existing deferred tax balances, which is included as a component of income tax benefit. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The Company is still analyzing certain aspects of the Tax Cuts and Jobs Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

Income Tax Benefit (Expense)



	Year Ended December 31,
(In thousands)	2017			2016			2015
Current
Federal	$	(20,316	)	$	(2,720	)	$	(451	)
State and local	(3,606		)	(1,436		)	(397		)
Foreign	(16,138		)	(8,244		)	(1,469		)
Total current tax expense	(40,060		)	(12,400		)	(2,317		)
Deferred
Federal	110,711			6,214			10,428
State and local	18,235			(713		)	1,219
Foreign	9,513			2,117			(34		)
Total deferred tax benefit	138,459			7,618			11,613
Total income tax benefit (expense)	$	98,399		$	(4,782	)	$	9,296

Deferred Income Tax Assets and Liabilities

Deferred tax asset is included in other assets while deferred tax liability is included in accrued and other liabilities, except for deferred tax liability in connection with a property holding entity that is held for sale, which is included in liabilities related to assets held for sale on the consolidated balance sheets.

Through the Merger, the Company assumed approximately $218.2 million of deferred tax liabilities, as well as deferred tax assets which were fully reserved with a valuation allowance of $31.9 million.

The components of deferred tax assets and deferred tax liabilities arising from temporary differences are as follows. Valuation allowance was established in 2017 and 2016 against net operating losses where it is more likely than not that these carry forward losses will not be utilized. The valuation allowance from 2016 was subsequently reversed in 2017 based on the Company's reassessment of recoverability.



	December 31,
(In thousands)	2017			2016
Deferred tax assets
Net operating and capital loss carry forwards ⁽¹⁾	$	30,019		$	2,563
Equity-based compensation	28,071			5,630
Basis difference—investment in partnerships	11,769			4,535
Basis difference—real estate	—			3,404
Foreign tax credits ⁽²⁾	1,682			1,184
Straight-line and prepaid rent expense	3,601			693
Deferred income	1,932			815
Deferred interest expense	1,924			—
Other	7,947			2,760
Gross deferred tax assets	86,945			21,584
Valuation allowance ⁽³⁾	(23,852		)	(692		)
Deferred tax assets, net of valuation allowance	63,093			20,892
Deferred tax liabilities
Management contract intangibles	(106,602		)	(25,186		)
Gain from remeasurement of consolidated investment entities, net	(1,594		)	(2,530		)
Basis difference—real estate	(68,687		)	(27,546		)
Other	(1,643		)	(1,394		)
Gross deferred tax liabilities	(178,526		)	(56,656		)
Net deferred tax liability	$	(115,433	)	$	(35,764	)

__________


⁽¹⁾	At December 31, 2017 and 2016, deferred tax asset was recognized on net operating losses of $95.3 million and $11.5 million, respectively. The net operating losses expire beginning 2030, other than those in the United Kingdom and Spain which can be carried forward indefinitely.


⁽²⁾	Foreign tax credits expire beginning 2025.


⁽³⁾	The ending balance of the valuation allowance at December 31, 2017 reflects a $12.3 million reduction resulting from the impact of the Tax Cuts and Jobs Acts.

Effective Income Tax

The Company's income tax benefit varied from the amount computed by applying the statutory income tax rate to income from continuing operations before income taxes. Income tax expense associated with income from discontinued operations was immaterial. A reconciliation of the statutory U.S. income tax to the Company's effective income tax is presented as follows:



	Year Ended December 31,
(Amounts in thousands)	2017			2016			2015
Income (loss) from continuing and discontinued operations before income taxes	$	(163,012	)	$	295,508		$	246,740
Pre-tax income attributable to pass-through subsidiaries	(89,104		)	(306,644		)	(277,902		)
Pre-tax loss attributable to taxable subsidiaries	(252,116		)	(11,136		)	(31,162		)
Federal tax benefit at statutory tax rate (35%)	88,241			3,365			10,907
State and local income taxes, net of federal income tax benefit	9,380			88			709
Foreign income tax differential	6			(5,441		)	(1,594		)
Nondeductible expenses	(20,372		)	(1,128		)	—
Excess inclusion income tax expense	—			(1,311		)	(203		)
Valuation allowance, net	(3,555		)	(692		)	—
Impact of Tax Cuts and Jobs Act	24,908			—			—
Other	(209		)	337			(523		)
Income tax benefit (expense)	$	98,399		$	(4,782	)	$	9,296

Tax Examinations and Uncertainty in Income Taxes

The Company is no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities for years prior to 2014.

As of December 31, 2017, there were no material unrecognized tax positions. For the years ended December 31, 2017, 2016 and 2015, the Company has not recognized any interest and penalties related to uncertain tax positions.