9. Income Taxes

The Company has elected to be taxed as a REIT under the under the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to corporate level federal income taxes on net income it distributes to its stockholders. 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. The Company may also be subject to federal and/or state income taxes when using net operating loss carryforwards to offset current taxable income.

The Company leases its hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of the Income Taxes Topic of the FASB ASC, which requires the Company to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases.

During 2015, the Company recognized combined federal and state income tax expense of $0.7 million related to its sale of BuyEfficient, and $0.7 million based on 2015 projected taxable income net of operating loss carryforwards for its taxable entities. In addition, upon the sale of the Preferred Equity Investment and settlement of the working capital loan associated with the Rochester Portfolio (see Note 4), the Company recorded $0.1 million in income tax expense, which is included in discontinued operations in the Company’s consolidated statements of operations.

During 2014, the Company recognized a combined federal and state income tax provision of $0.2 million based on a 2013 actual tax benefit of $0.6 million, partially offset by a 2014 projected tax provision net of operating loss carryforwards of $0.8 million for its taxable entities.

During 2013, the Company recognized income tax expense of $4.7 million as a result of Internal Revenue Service (“IRS”) audits of tax years 2008, 2009 and 2010, including $0.6 million in accrued interest. The Company recorded additional income tax expense of $1.5 million during 2013 based on the ongoing evaluations of its uncertain tax positions related to the year ended December 31, 2012, and as a result of its resolution of outstanding issues with the IRS. During 2013, the Company recorded additional tax expense of $1.9 million related to estimated 2013 federal alternative minimum tax resulting from its use of net operating loss carryforwards, as well as state income tax where the Company’s use of net operating loss carryforwards was either limited or unavailable.

The Company recognizes penalties and interest related to unrecognized tax benefits in income tax expense. During 2015, 2014 and 2013, the Company recognized $55,000, $50,000 and $0.6 million in interest expense related to its tax provisions, respectively.

The income tax provision for the Company is included in the consolidated financial statements as follows (in thousands):


	Year Ended		Year Ended		Year Ended
	December 31,		December 31,		December 31,
	2015		2014		2013
Current:
Federal	$	760	$	255	$	6,371
State		779		(76)		1,774
Total current income tax provision	$	1,539	$	179	$	8,145
Deferred:
Federal	$	(4,856)	$	(2,341)	$	(9,488)
State		(1,254)		(598)		(2,426)
Change in valuation allowance		6,110		2,939		11,914
Total deferred income tax provision	$	—	$	—	$	—

The tax effects of temporary differences giving rise to the deferred tax assets (liabilities) are as follows (in thousands):


	December 31,
	2015		2014
NOL carryover	$	14,977	$	28,420
Other reserves		2,005		2,784
State taxes and other		3,157		(4,766)
Depreciation		564		375
Deferred tax asset before valuation allowance		20,703		26,813
Valuation allowance		(20,703)		(26,813)
Deferred tax asset net of valuation allowance	$	—	$	—

The Company has provided a valuation allowance against its net deferred tax asset at December 31, 2015 and 2014. The valuation allowance is due to the uncertainty of realizing the Company’s historical operating losses. Accordingly, no provision or benefit for deferred income taxes related to the Company is reflected in the accompanying consolidated statements of operations.

At December 31, 2015 and 2014, the net operating loss carryforwards for federal income tax purposes totaled approximately $38.1 million and $72.3 million, respectively. These losses, which begin to expire in 2029, are available to offset future income through 2032.

Characterization of Distributions

For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. For the years ended December 31, 2015, 2014 and 2013, distributions paid per share were characterized as follows (unaudited):


	2015				2014				2013
	Amount		%		Amount		%		Amount		%
Common Stock:
Ordinary income	$	0.661	46.86	%	$	0.510	100	%	$	0.100	100	%
Capital gain		0.749	53.14			—	—			—	—
Return of capital		—	—			—	—			—	—
Total	$	1.410	100	%	$	0.510	100	%	$	0.100	100	%

Preferred Stock — Series A
Ordinary income	$	—	—	%	$	—	—	%	$	0.330	100	%
Capital gain		—	—			—	—			—	—
Return of capital		—	—			—	—			—	—
Total	$	—	—	%	$	—	—	%	$	0.330	100	%

Preferred Stock — Series C
Ordinary income	$	—	—	%	$	—	—	%	$	0.656	100	%
Capital gain		—	—			—	—			—	—
Return of capital		—	—			—	—			—	—
Total	$	—	—	%	$	—	—	%	$	0.656	100	%

Preferred Stock — Series D
Ordinary income	$	0.937	46.86	%	$	2.000	100	%	$	2.000	100	%
Capital gain		1.063	53.14			—	—			—	—
Return of capital		—	—			—	—			—	—
Total	$	2.000	100	%	$	2.000	100	%	$	2.000	100	%