12. Income Tax

We elected and qualified to be taxed as a REIT commencing with our taxable year ending December 31, 2013. As a REIT, we are not subject to federal corporate income tax on that portion of net income that is currently distributed to our owners. However, our TRSs will generally be subject to federal, state, and local income taxes, as well as taxes of foreign jurisdictions, if any. Prior to the completion of the IPO, the Predecessor was taxed as a partnership for U.S. federal income tax purposes.

We account for income taxes of our TRS using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.

During the three months ended March 31, 2014, we transferred an asset to our TRS that had a tax basis in excess of its book basis. We recognized a deferred tax asset for the amount we expect to be realizable. Because the transfer was done amongst entities under common control, we recorded the $1.9 million impact of the transaction to additional paid in capital. During the three months ended March 31, 2014, we established a $2.5 million valuation allowance against our deferred tax asset. As of December 31, 2014 and 2013, we had no valuation allowance against our deferred tax assets.

We recorded a tax (expense)/benefit of ($0.0) million and $0.3 million for the years ended December 31, 2014 and 2013, respectively, related to the activities of our TRS. The income tax expense and benefits recorded were determined using a federal rate of 35% and a combined state rate, net of federal benefit, of 5%. The effective tax rate for the TRS for the year ended December 31, 2014, was 0%, which is below the combined statutory tax rate of 40% primarily as a result of the release of a valuation allowance of approximately $2.5 million.

The components of the income tax benefit for the years ended December 31, 2014 and 2013 are as follows:

We recorded a deferred tax liability of $0.1 million and $1.8 million as of December 31, 2014 and 2013, 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, and for equity-based compensation it represents the impact of the vesting of restricted stock. Deferred tax assets (liabilities) include the following as of December 31:

The ability to carryforward the NOL of approximately $4.4 million will begin to expire in 2034 for federal and state tax purposes if not utilized. 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.

No provision for federal or state income taxes has been made for the three months ended December 31, 2012, or for the year ended September 30, 2012, in the accompanying consolidated financial statements, since our profits and losses were reported on the Predecessor’s members’ tax returns.

For federal income tax purposes, the cash dividends paid for the years ended December 31, 2014 and 2013 are characterized as follows:

As our aggregate distributions paid in 2014 and 2013 exceeded our taxable earnings and profits for such year: