Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The Company elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1999. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to its shareholders. It is the Company’s current intention to adhere to these requirements and maintain the Company’s qualification for taxation as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax for taxable years prior to 2018) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.

Taxable income from non-REIT activities managed through TRSs is subject to federal, state and local income taxes. As a TRS, 44 New England is subject to income taxes at the applicable federal, state and local tax rates.

The provision for income taxes differs from the amount of income tax determined by applying the applicable statutory federal income tax rate (21% for 2019 and 2018 and 34% for 2017) to pretax income from continuing operations as a result of the following differences:



	For the year ended December 31,
	2019			2018			2017
Statutory federal income tax provision	$	(1,208	)	$	1,813		$	37,469
Adjustment for nontaxable income for Hersha Hospitality Trust	1,419			(1,269		)	(37,670		)
Remeasurement of net deferred tax asset - Tax Cuts & Jobs Act	—			—			4,601
State income taxes, net of federal income tax effect	456			32			338
Non-deductible expenses, tax credits, and other, net	(575		)	(309		)	524

Total income tax expense (benefit)	$	92		$	267		$	5,262

The Tax Cuts and Jobs Act was enacted on December 22, 2017 and instituted significant changes to the federal income tax law. Effective January 1, 2018, the U.S. statutory rate applicable to the Company decreased from 34% to 21%. As a result of the decrease in statutory rate, our deferred tax assets and liabilities that will apply to future periods were remeasured as of December 31, 2018. We recognized a deferred tax expense of $4,601 during the year ended December 31, 2017 to reflect this change in the tax rate.

NOTE 13 – INCOME TAXES (CONTINUED)

The components of the Company’s income tax expense (benefit) from continuing operations for the years ended December 31, 2019, 2018 and 2017 were as follows:



	For the year ended December 31,
	2019			2018			2017
Income tax expense (benefit):
Current:
Federal	$	(60	)	$	(119	)	$	—
State	464			530			—
Deferred:
Federal	(302		)	467			4,750
State	(10		)	(611		)	512
Total	$	92		$	267		$	5,262

The components of consolidated TRS’s net deferred tax asset as of December 31, 2019 and 2018 were as follows:



	As of December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	9,871		$	9,700
Accrued expenses and other	1,641			1,644
Tax credit carryforwards	415			475
Total gross deferred tax assets	11,927			11,819
Valuation allowance	(497		)	(497		)
Total net deferred tax assets	$	11,430		$	11,322
Deferred tax liabilities:
Depreciation and amortization	40			244
Total Net deferred tax assets	$	11,390		$	11,078

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on limitations related to the utilization of certain tax attribute carryforwards, the Company recorded a valuation allowance of approximately $497 as these attributes are not more likely than not to be realized prior to their expiration. Based on the level of historical taxable income, tax planning strategies and projections for future taxable income over the periods in which the remaining deferred tax assets are deductible, Management believes it is more likely than not that the remaining deferred tax assets will be realized.

As of December 31, 2019, we have gross federal net operating loss carryforwards of $35,287 which expire over various periods from 2023 through 2039. As of December 31, 2019, we have gross state net operating loss carryforwards of $39,723 which expire over various periods from 2020 to 2039. The Company has tax credits of $415 available which begin to expire in 2032.

NOTE 13 – INCOME TAXES (CONTINUED)

Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the estimated useful lives and methods used to compute depreciation. The following table sets forth certain per share information regarding the Company’s common and preferred share distributions for the years ended December 31, 2019, 2018 and 2017.



	2019		2018		2017
Preferred Shares - 6.875% Series C
Ordinary income	100.00	%	100.00	%	100.00	%
Return of Capital	0.00	%	0.00	%	0.00	%
Capital Gain Distribution	0.00	%	0.00	%	0.00	%
Preferred Shares - 6.5% Series D
Ordinary income	100.00	%	100.00	%	100.00	%
Return of Capital	0.00	%	0.00	%	0.00	%
Capital Gain Distribution	0.00	%	0.00	%	0.00	%
Preferred Shares - 6.5% Series E
Ordinary income	100.00	%	100.00	%	100.00	%
Return of Capital	0.00	%	0.00	%	0.00	%
Capital Gain Distribution	0.00	%	0.00	%	0.00	%
Common Shares - Class A
Ordinary income	33.03	%	37.91	%	70.95	%
Return of Capital	66.97	%	62.09	%	29.05	%
Capital Gain Distribution	0.00	%	0.00	%	0.00	%