Federal Income Tax Reporting

12 Months Ended

Dec. 31, 2020

Federal Income Tax Reporting

Federal Income Tax Reporting

7.   Federal Income Tax Reporting

General

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.

One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”). In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 20% (25% of taxable years beginning on or before December 31, 2017) of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets. FSP Investments LLC and FSP

Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code. The TRSs have gross amounts of net operating losses (“NOLs”) available to those taxable corporations of $4.6 million and $4.4 million as of each of December 31, 2020 and 2019, respectively. The NOLs created prior to 2018 will expire between 2030 and 2047 and the NOLs generated after 2017 will not expire. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured.

Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.

The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company and one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2017 and thereafter.

The Company is subject to a business tax known as the Revised Texas Franchise Tax. Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure, it is considered an income tax. The Company recorded a provision for the Revised Texas Franchise Tax of $0.3 million, $0.4 million and $0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Net operating losses

Section 382 of the Code restricts a corporation’s ability to use net operating losses (“NOLs”) to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured. The gross amount of NOLs available to the Company was $13.0 million as of each of December 31, 2020, 2019 and 2018.

Income Tax Expense

The income tax expense reflected in the consolidated statements of income relates primarily the Revised Texas Franchise Tax. FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties and the tax expense associated with these activities are reported as Other Taxes in the table below:

	For the Year Ended December 31,
(Dollars in thousands)	2020		2019		2018
Revised Texas Franchise Tax	$	250	$	394	$	319
Other Taxes		—		(125)		41
Tax expense	$	250	$	269	$	360

Taxes on income are a current tax expense. No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.

At December 31, 2020, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $253.0 million and at December 31, 2019, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $195.0 million.

Reconciliation Between GAAP Net Income and Taxable Income

The following reconciles GAAP net income to taxable income for the years ended December 31, 2020, 2019 and 2018.

	For the year ended December 31,
(in thousands)	2020		2019		2018
Net income per GAAP	$	32,615	$	6,475	$	13,069
Adjustments to GAAP net income:
GAAP depreciation and amortization		88,244		90,507		93,675
Tax depreciation and amortization		(79,542)		(66,376)		(62,657)
Tax basis more than GAAP basis on assets sold		(11,450)		—		—
Straight line rent adjustment, net		(1,685)		(10,462)		(1,350)
Deferred rent, net		1,956		535		210
Non-taxable distributions		—		—		(710)
Other, net		390		4,099		(6,651)
Taxable income		30,528		24,778		35,586
Less: Capital gains recognized		7,576		—		—
Taxable income subject to distribution requirement	$	22,952	$	24,778	$	35,586

Tax Components

The following summarizes the tax components of the Company’s common distributions paid per share for the years ended December 31, 2020, 2019 and 2018:

	2020				2019				2018
	Per Share		%		Per Share		%		Per Share		%
Ordinary income (1)	$	0.28	77.51	%	$	0.25	69.96	%	$	0.35	76.39	%
Capital gain		0.06	16.72	%		—	—	%		—	—	%
Return of capital		0.02	5.77	%		0.11	30.04	%		0.11	23.61	%
Total	$	0.36	100	%	$	0.36	100	%	$	0.46	100	%

(1) The 2019 Ordinary income amount includes a qualified distribution, which is a subset of, and included in, the ordinary income amount and is $0.009 per share or 2.52% of total distributions.