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 2016, the Company reversed a $1.5 million income tax accrual that it had previously recorded during 2013, plus $0.1 million in accrued interest, through the 2016 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset as the Company recognized combined federal and state income tax expense of $1.0 million based on 2016 projected taxable income net of operating loss carryforwards for its taxable entities.

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, net of tax 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.

The Company recognizes penalties and interest related to unrecognized tax benefits in income tax expense. During 2016, 2015 and 2014, the Company recognized $42,000, $55,000 and $50,000 in interest expense related to its tax provisions, respectively.

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


	2016		2015		2014
Current:
Federal	$	(1,379)	$	760	$	255
State		763		779		(76)
Total current income tax (benefit) provision	$	(616)	$	1,539	$	179
Deferred:
Federal	$	(3,797)	$	(4,856)	$	(2,341)
State		(1,638)		(1,254)		(598)
Change in valuation allowance		5,435		6,110		2,939
Total deferred income tax provision	$	—	$	—	$	—

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


	December 31,
	2016		2015
NOL carryover	$	10,270	$	14,977
Other reserves		1,945		2,005
State taxes and other		2,351		3,157
Depreciation		702		564
Deferred tax asset before valuation allowance		15,268		20,703
Valuation allowance		(15,268)		(20,703)
Deferred tax asset net of valuation allowance	$	—	$	—

The Company has provided a valuation allowance against its net deferred tax asset at December 31, 2016 and 2015. 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, 2016 and 2015, the net operating loss carryforwards for federal income tax purposes totaled approximately $27.1 million and $38.1 million, respectively. These losses, which begin to expire in 2031, 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, 2016, 2015 and 2014, distributions paid per share were characterized as follows (unaudited):


	2016				2015				2014
	Amount		%		Amount		%		Amount		%
Common Stock:
Ordinary income	$	0.609	89.62	%	$	0.661	46.86	%	$	0.510	100	%
Capital gain		0.071	10.38			0.749	53.14			—	—
Return of capital		—	—			—	—			—	—
Total	$	0.680	100	%	$	1.410	100	%	$	0.510	100	%

Preferred Stock — Series D
Ordinary income	$	0.473	89.62	%	$	0.937	46.86	%	$	2.000	100	%
Capital gain		0.055	10.38			1.063	53.14			—	—
Return of capital		—	—			—	—			—	—
Total	$	0.528	100	%	$	2.000	100	%	$	2.000	100	%

Preferred Stock — Series E
Ordinary income	$	1.259	89.62	%	$	—	—	%	$	—	—	%
Capital gain		0.146	10.38			—	—			—	—
Return of capital		—	—			—	—			—	—
Total	$	1.405	100	%	$	—	—	%	$	—	—	%

Preferred Stock — Series F
Ordinary income	$	0.903	89.62	%	$	—	—	%	$	—	—	%
Capital gain		0.105	10.38			—	—			—	—
Return of capital		—	—			—	—			—	—
Total	$	1.008	100	%	$	—	—	%	$	—	—	%