Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company derives a significant portion of its income from the rental and sale of real property. As a result, a substantial portion of its foreign earnings is subject to U.S. taxation under certain provisions of the Internal Revenue Code of 1986, as amended, applicable to controlled foreign corporations ("Subpart F"). In determining the quarterly provisions for income taxes, the Company calculates income tax expense based on actual year-to-date income and statutory tax rates. The year-to-date income tax expense reflects the impact of foreign operations and income allocated to noncontrolling interests which is generally not subject to corporate tax.

During the three months ended March 31, 2020, Kennedy Wilson generated pre-tax book loss of $0.2 million related to its global operations and recorded a tax expense of $5.7 million. The tax expense for the quarter is above the US statutory tax rate, primarily as a result of non-deductible executive compensation and an increase in the valuation allowance on deferred tax assets associated with the Company’s tax basis in excess of its book carrying value for its investment in the KWE partnership.

Kennedy Wilson elected to treat KWE as a partnership for U.S. tax purposes effective as of December 29, 2017. Due to unrealized foreign exchange losses not yet deductible for tax purposes and the consideration paid to acquire the non-controlling interests in KWE exceeding the book carrying value of the non-controlling interests in KWE, the Company’s tax basis in KWE exceeded its book carrying value at December 29, 2017, December 31, 2018 and December 31, 2019.  Due to the conversion of KWE to a partnership for U.S. tax purposes, the Company was required to record a deferred tax asset related to its excess tax basis over book carrying value for its investment in KWE.  As a significant portion of the excess tax basis would only reverse upon a strengthening of foreign currencies or upon a disposition of KWE, the Company determined that a valuation allowance was required for substantially all of the tax basis that was in excess of the Company’s carrying value for its investment in KWE. As of March 31, 2020, Kennedy Wilson's excess tax basis in KWE and the related valuation allowance was $85.2 million and $85.2 million, respectively, while as of December 31, 2019, Kennedy Wilson's excess tax basis in KWE and the related valuation allowance was $77.1 million and $72.6 million, respectively.

The CARES Act (the “Act”) was signed in law on March 27, 2020. The Act provides for carrybacks of 2018, 2019 and 2020 losses, retroactive cost recovery of qualified improvement property, increases in interest deduction allowances and accelerating the refund of prior alternative minimum taxes paid. The Company has performed a preliminary assessment of the CARES Act and has determined that the tax provisions of the Act will not have a significant impact on the Company’s taxes.