Income Taxes

12 Months Ended

Dec. 31, 2019

As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.

Based on the Company's analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of December 31, 2019. The Company files U.S. federal and state income tax returns. As of December 31, 2019, U.S. federal tax returns filed by the Company for 2018, 2017 and 2016 and state tax returns filed for 2018, 2017, 2016 and 2015 are open for examination pursuant to relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company's policy is to classify them as a component of its provision for income taxes.

Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more TRS. Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. For the years ended December 31, 2019, December 31, 2018 and December 31, 2017, the Company recorded a federal and state tax provision of approximately $1.1 million, $709 thousand and $3.5 million, respectively.

The following table summarizes the Company's income tax provision for the years ended December 31, 2019, December 31, 2018 and December 31, 2017 (dollars in thousands):



	For the year ended December 31, 2019		For the year ended December 31, 2018		For the year ended December 31, 2017
Current Tax Provision (Benefit)
Federal	$	860	$	709	$	4,076
State	197		—		(267		)
Total Current Provision for Income Taxes, net	1,057		709		3,809
Deferred Provision (Benefit) for Income Taxes
Federal	—		—		85
State	—		—		(407		)
Total Deferred Benefit for Income Taxes, net	—		—		(322		)
Total Income Tax Provision, net	$	1,057	$	709	$	3,487

Deferred Tax Asset and Deferred Tax Liability

As of December 31, 2019 and December 31, 2018, the Company recorded a deferred tax asset of approximately $8.5 million and $6.0 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing of income recognition of certain investments held in the TRS. The capital loss carryforwards may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance.

In addition, the REIT generated net operating losses ("NOL's") for the year ended December 31, 2017 related to its swap terminations and for the California return a portion of the NOL's is apportioned to the TRS. The Company recorded a deferred

state tax asset of $6.0 million and $5.5 million in the REIT and $1.3 million and $993 thousand in the TRS as of December 31, 2019 and December 31, 2018, respectively. The TRS can carryback the NOL's to each of the two preceding years and receive a refund for taxes paid. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized with the exception of the TRS carryback to 2015 and has recorded a combined valuation allowance of $6.9 million and $6.1 million as of December 31, 2019 and December 31, 2018, respectively. The Company also recorded a deferred federal tax liability of $85 thousand, as of December 31, 2019 and December 31, 2018, in anticipation of the receipt of the state tax refund as a result of the carryback of the California NOL.

The following tables disclose the components of the Company's deferred tax asset and deferred tax liability at December 31, 2019 and 2018 (dollars in thousands):



Deferred Tax Asset	December 31, 2019			December 31, 2018
Net operating loss available for carry-back and carry-forward ⁽¹⁾	$	7,295		$	6,503
Net capital loss carry-forward ⁽¹⁾	6,775			4,271
Investments	1,719			1,720
Deferred tax asset	15,789			12,494
Allowance	(15,382		)	(12,087		)
Net deferred tax asset	$	407		$	407



Deferred Tax Liability	December 31, 2019		December 31, 2018
Net operating loss available for carry-back and carry-forward	$	85	$	85
Net deferred tax liability	$	85	$	85

⁽^{1) Net operating loss available for carry-forward begin to expire in 2037. Net capital loss available for carry-forward begin to expire in 2020.}

Reconciliation of Tax Rate to Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to the deduction of dividends distributions to be paid under Code Section 857(a). The reconciliation of these rates are as follows:



	For the year ended December 31, 2019		For the year ended December 31, 2018
Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of federal benefit	(1.0	)%	1.5	%
Other	0.1	%	(0.8	)%
Change in valuation allowance	3.6	%	(1.3	)%
REIT earnings not subject to corporate taxes	(22.2	)%	(17.8	)%
Effective Tax Rate	1.5	%	2.6	%

Tax Cuts and Jobs Act

On December 22, 2017, the President of the United States signed and enacted comprehensive tax legislation into law H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%.