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Income Tax
We recorded an income tax expense of approximately $8 million, for the year ended December 31, 2019, $2 million for the year ended December 31, 2018 and $0.8 million for the year ended 2017, related to the activities of our TRS. The federal income tax expense and benefits recorded were determined using a rate of 21% in 2019 and 2018 and 35% in 2017. Our deferred tax assets and liabilities were measured using a federal rate of 21% in 2019. Below is a reconciliation between the statutory rates of our TRS entities as of December 31, 2019 and our effective tax rates for the years ended December 31:
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2019 |
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2018 |
|
2017 |
Federal statutory income tax rate |
21 |
% |
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21 |
% |
|
35 |
% |
Changes in rate resulting from: |
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|
Share-based compensation |
2 |
% |
|
(1 |
)% |
|
(8 |
)% |
Equity method investments |
(2 |
)% |
|
(11 |
)% |
|
(83 |
)% |
Other |
(1 |
)% |
|
2 |
% |
|
6 |
% |
Valuation allowance |
(15 |
)% |
|
2 |
% |
|
49 |
% |
TCJA rate revaluation adjustment |
— |
% |
|
— |
% |
|
1 |
% |
Effective tax rate |
5 |
% |
|
13 |
% |
|
— |
% |
Our deferred tax liability was $14 million and $2 million as of December 31, 2019 and 2018, respectively, related to the activities of our TRS. Our deferred tax liability is included in accounts payable, accrued expenses and other on our consolidated balance sheet. Deferred income taxes represent the tax effect from continuing operations of the differences between the book and tax basis of assets and liabilities. Deferred tax assets (liabilities) include the following as of December 31:
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2019 |
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2018 |
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(in millions) |
Net operating loss (NOL) carryforwards |
31 |
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|
34 |
|
Tax credit carryforwards |
13 |
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|
12 |
|
Share-based compensation |
3 |
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|
3 |
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Other |
3 |
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|
— |
|
Valuation allowance |
— |
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(11 |
) |
Gross deferred tax assets |
50 |
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|
38 |
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Receivables basis difference |
$ |
(12 |
) |
|
$ |
(9 |
) |
Equity method investments |
(52 |
) |
|
(31 |
) |
Gross deferred tax liabilities |
(64 |
) |
|
(40 |
) |
Net deferred tax liabilities |
$ |
(14 |
) |
|
$ |
(2 |
) |
We have unused NOLs of $121 million and tax credits of approximately $13 million. Approximately, $105 million of our NOLs will begin to expire in 2035. If our TRS entities were to experience a change in control as defined in Section 382 of the Internal Revenue Code, the TRS’s ability to utilize NOL in the years after the change in control would be limited. Similar rules and limitation may apply for state tax purposes as well. Of our NOLs, $16 million were added in 2018 and 2019, which are not subject to expiration but are limited to 80% of taxable income. We have $13 million of tax credits related to our renewable energy investments which begin to expire in 2034.
We have no examinations in progress, none are expected at this time, and years 2016 through 2019 are open. As of December 2019 and 2018, we had no uncertain tax positions. Our policy is to recognize interest expense and penalties related to income tax matters as a component of general and administrative expense. There were no accrued interest and penalties as of December 31, 2019 and 2018, and no interest and penalties were recognized during the years ended December 31, 2019, 2018, or 2017.
For federal income tax purposes, the cash dividends paid for the years ended December 31, 2019 and 2018 are characterized as follows:
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2019 |
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2018 |
Common distributions |
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Ordinary income |
18 |
% |
|
— |
% |
Return of capital |
82 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
U.S. Federal Income Tax Legislation
The TCJA, which was signed into law on December 22, 2017, made significant changes to the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders. Certain key provisions of the TCJA impact us and could impact us in the future , include the following:
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Reduced tax rates - the highest individual U.S. federal income tax rate on ordinary income is reduced from 39.6% to 37% (through taxable years ending in 2025), and the maximum corporate income tax rate is reduced from 35% to 21%. In addition, individuals, trust, and estates that own our stock are permitted to deduct up to 20% of dividends received from us (other than dividends that are designated as capital gain dividends or qualified dividend income), generally resulting in an effective maximum U.S. federal income tax rate of 29.6% on such dividends (through taxable years ending in 2025). Further, the amount that we are required to withhold on distributions to non-U.S. stockholders that are treated as attributable to gains from our sale or exchange of U.S. real property interests is reduced from 35% to 21%.
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Net operating losses - we and our TRSs may not use NOLs generated beginning in 2018 to offset more than 80% of our or our TRSs’ taxable income (prior to the application of the dividends paid deduction). NOLs generated beginning in 2018 can be carried forward indefinitely but can no longer be carried back.
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Limitation on interest deductions - the amount of net interest expense that certain taxpayers, including us and our TRSs, may deduct for a taxable year is limited to the sum of (i) the taxpayer’s business interest income for the taxable year, and (ii) 30% of the taxpayer’s “adjusted taxable income” for the taxable year. For taxable years beginning before January 1, 2022, adjusted taxable income means earnings before interest, taxes, depreciation, and amortization; for taxable years beginning on or after January 1, 2022, adjusted taxable income is limited to earnings before interest and taxes.
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Alternative Minimum Tax - the corporate alternative minimum tax is eliminated.
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Income accrual - we and our TRSs are required to recognize certain items of income for U.S. federal income tax purposes no later than we would report such items on our financial statements. Earlier recognition of income for U.S. federal income tax purposes could impact our ability to satisfy the REIT distribution requirements. However, recently released proposed Treasury Regulations generally would exclude, among other items, original issue discount (whether or not de minimis) and market discount from the applicability of this rule. Although the proposed Treasury Regulations generally will not be effective until taxable years beginning after the date on which they are issued in final form, we generally are permitted to elect to rely on the proposed Treasury Regulations currently.
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Tax credits - the TCJA modifies the availability and the use by certain taxpayers of certain tax credits for investments in certain wind, solar, and other renewable energy assets.
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