Income Taxes

12 Months Ended

Dec. 31, 2019

As mentioned in Note 2, the Company qualifies as a REIT under the Code. As a REIT, the Company is not subject to federal income tax as long as it distributes at least 90% of its taxable income to its shareholders each year. If the Company’s taxable income exceeds its distributions for the year, the REIT tax rules allow the Company to designate distributions from a subsequent tax year in order to avoid current taxation on undistributed income. No provision for federal income taxes for the REIT has been included in the accompanying consolidated financial statements as the Company expects to meet the 90% annual distribution requirement. If the Company fails to qualify as a REIT, the Company will be subject to federal income tax (including any applicable alternative minimum tax for tax years ending on or prior to December 31, 2017) on its taxable income and to federal income and excise taxes on its undistributed income. In addition, ACCOP is a flow-through entity and is not subject to federal income taxes at the entity level. Historically, the Company has incurred only state and local income, franchise and margin taxes.

The Company’s TRSs are subject to federal, state, and local income taxes. As such, deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities of the TRSs for financial reporting purposes and the amounts used for income tax purposes. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law and included wide-scale changes to individual, flow-through and corporation tax laws, including those that impact the real estate industry, the ownership of real estate and real estate investments, and REITs. One significant change was a reduction of the federal corporate income tax rate to 21%. The new rate became effective on January 1, 2018 and is a significant decrease from the prior graduated rate structure, which included a 35% maximum. Given that deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse, the deferred balances below reflect the impact of the rate reduction. As of December 31, 2019, we have reviewed the provisions of the new tax laws that pertain to the Company and have determined them to have no other material income tax effect for financial statement purposes.



	December 31,
	2019			2018
Deferred tax assets:
Fixed and intangible assets	$	1,488		$	365
Net operating loss carryforwards	7,290			9,277
Prepaid and deferred income	1,115			866
Bad debt reserves	528			656
Leases	3,480			—
Accrued expenses and other	4,049			3,208
Stock compensation	2,636			2,083
Total deferred tax assets	20,586			16,455
Valuation allowance for deferred tax assets	(17,121		)	(16,390		)
Deferred tax assets, net of valuation allowance	3,465			65

Deferred tax liability:
Leases	(3,413		)	—
Deferred financing costs	(52		)	(65		)

Net deferred tax liabilities	$	—		$	—

Significant components of the Company’s income tax provision are as follows:



	Year Ended December 31,
	2019			2018			2017
Current:
Federal	$	(157	)	$	—		$	—
State	(1,350		)	(2,429		)	(989		)
Deferred:
Federal	—			—			—
State	—			—			—
Total provision	$	(1,507	)	$	(2,429	)	$	(989	)

TRS earnings subject to tax consisted of income of approximately $10.0 million for the year ended December 31, 2019 and losses of approximately $2.0 million and $8.4 million for the years ended December 31, 2018, and 2017, respectively. The reconciliation of income tax for the TRSs computed at the U.S. statutory rate to income tax provision is as follows:



	Year Ended December 31,
	2019			2018			2017
Tax (provision) benefit at U.S. statutory rates on TRS income subject to tax	$	(789	)	$	327		$	1,277
State income tax, net of federal income tax benefit	(57		)	13			57
Effect of permanent differences and other	5			(154		)	207
Deferred tax impact of tax reform	—			—			(9,206		)
Decrease (increase) in valuation allowance	841			(186		)	7,665
TRS income tax provision	$	—		$	—		$	—

At December 31, 2019, the TRSs had net operating loss carryforwards (“NOLs”) of approximately $27.4 million for income tax purposes that begin to expire in 2031. These NOLs may be used to offset future taxable income generated by each of the respective TRSs. Due to the various limitations to which the use of NOLs are subject, the Company has applied a valuation allowance to the NOLs given the likelihood that the NOLs will expire unused. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states’ jurisdictions as required, and as of December 31, 2019, the 2018, 2017 and 2016 calendar tax years are subject to examination by the tax authorities.

The Company had no material unrecognized tax benefits for the years ended December 31, 2019, 2018, and 2017, and as of December 31, 2019, the Company does not expect to record any material unrecognized tax benefits. Because no material unrecognized tax benefits have been recorded, no related interest or penalties have been calculated.

A schedule of per share distributions the Company paid and reported to its shareholders, which is unaudited, is set forth in the following table:



	Year Ended December 31,
Tax Treatment of Distributions:	2019		2018		2017
Ordinary income	$	0.6625	$	—	$	0.8316
Long-term capital gain ⁽¹⁾	1.2075		1.8200		—
Return of capital	—		—		0.9084
Total per common share outstanding	$	1.8700	$	1.8200	$	1.7400

⁽¹⁾

Unrecaptured Sec. 1250 gains of $0.3827 and $0.4008 were reported for the years ended December 31, 2019 and 2018, respectively. There was no unrecaptured Sec. 1250 gain reported for the year ended December 31, 2017.