INCOME TAXES

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

We have elected to be taxed as a REIT. As a REIT, we are generally not subject to corporate level income taxes on taxable income we distribute to our shareholders. We believe we have met the annual REIT distribution requirement by distribution of at least 90% of our taxable income to our shareholders.

Income related to our TRSs is subject to federal, state and local taxes at applicable tax rates. Our consolidated tax provision includes the income tax provision related to the operations of the TRSs as well as state and local income taxes related to the Operating Partnership. Due to the adverse effects of the COVID-19 pandemic, certain of our TRSs have incurred operating losses and are expected to be in a cumulative loss for the foreseeable future. As such, the realizability of our deferred tax assets at December 31, 2020 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all of our deferred tax assets at December 31, 2020.

The components of income tax expense (benefit) for the years ended December 31, 2020, 2019, and 2018 are as follows (in thousands):

	2020		2019		2018
Current:
Federal	$	(904)	$	869	$	(67)
State and local	224		643		(425)
Deferred:
Federal	1,548		(32)		(279)
State and local	508		20		(151)
Income tax expense (benefit)	$	1,376	$	1,500	$	(922)

Below is a reconciliation between the provision for income taxes and the amounts computed by applying the federal statutory income tax rate to the income or loss before taxes:

	2020		2019		2018
Statutory federal income tax provision	$	(31,052)	$	17,608	$	18,943
Nontaxable income of the REITs	19,963		(16,996)		(19,073)
State income taxes, net of federal tax benefit	(3,079)		568		266
Provision to return and deferred adjustment	(16)		(6)		75
Effect of permanent differences and other	319		326		(184)
Tax benefit from deduction for partnership distributions	—		—		(949)
Change in valuation allowance	15,241		—		—
Income tax provision (benefit)	$	1,376	$	1,500	$	(922)

The Company evaluates its deferred tax assets each reporting period to determine if it is more-likely-than-not that those assets will be realized. In its evaluation, the Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the Company’s existing deferred tax assets. At December 31, 2020, certain TRSs had a three-year cumulative loss. As such, realizability of the Company's deferred tax assets is not reasonably assured. Therefore, a valuation allowance of $15.2 million was recorded against the balance of deferred tax assets at December 31, 2020.

Deferred tax assets and liabilities are included within Other assets in the accompanying Consolidated Balance Sheets.

Significant components of our TRSs deferred tax assets (liabilities) are as follows (in thousands):

	2020		2019
Tax carryforwards	$	13,521	$	38
Accrued expenses	1,537		2,068
Other	185		32
Valuation allowance	(15,241)		—
Net deferred tax assets	$	2	$	2,138
Gross deferred tax assets	$	15,267	$	2,172
Gross deferred tax liabilities	(24)		(34)
Valuation allowance	(15,241)		—
Net deferred tax assets	$	2	$	2,138

At December 31, 2020, our TRSs had federal net operating losses of $48.7 million which are not subject to expiration and state net operating losses of $50.8 million, which expire beginning in 2025. At December 31, 2020, Summit Hotel Properties Inc. and our Subsidiary REITs had federal net operating loss carryforwards of $54.9 million and $1.9 million, respectively, which are not subject to expiration.

We had no unrecognized tax benefits at December 31, 2020 or in the three year period then ended. We expect no significant increase or decrease in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2020. We have no material interest or penalties relating to unrecognized tax benefits in the Consolidated Statements of Operations for the years ended December 31, 2020, 2019 or 2018 or in the Consolidated Balance Sheets as of December 31, 2020 or 2019.

We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. In general, we are not subject to tax examinations by tax authorities for years before 2016.

The business tax provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was signed into law on March 27, 2020, include temporary changes to income and non-income-based tax laws. Some of the key income tax provisions include:

•Eliminating the 80% of taxable income limitations by allowing corporate entities to fully utilize net operating loss (NOL) carryforwards to offset taxable income in 2018, 2019, or 2020, and reinstating it for tax years after 2020;

•Allowing NOLs generated in 2018, 2019, or 2020, to be carried back five years. Our TRSs generated net operating losses in 2020. As such, we expect a $1.0 million future tax benefit from the NOL carry-back provisions provided in the CARES Act;

•Increasing the net interest expense deduction limit to 50% of adjusted taxable income from 30% for the 2019 and 2020 tax years;

•Allowing taxpayers with alternative minimum tax credits to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as required by the 2017 Tax Cut and Jobs Act;

•Allowing entities to deduct more of their charitable cash contributions made during calendar year 2020 by increasing the taxable income limitation to 25% from 10%; and

•Providing for an employee retention tax credit to offset the employer's share of payroll taxes for the period between March 13, 2020 and December 31, 2020. The credit is calculated based on 50% of qualifying wages, capped at the first $10,000 of compensation. We submitted amended payroll tax filings to recoup a credit of approximately $0.3 million.

The Consolidated Appropriations Act, 2021 signed into law on December 27, 2020 provided extended COVID-19 relief provisions and additional economic stimulus. Key tax provisions in this legislation included:

•Temporary allowance of a full deduction for business meals paid or incurred between December 31, 2020 and January 1, 2023.

•An expansion of employee retention tax credit provided under the CARES Act for the period January 1, 2021 to June 30, 2021. The credit is calculated based on 70% of qualifying wages, capped at $10,000 of compensation each of the first two quarters in 2021. We anticipate a credit of approximately $0.7 million in 2021.

•An expansion of the charitable contribution provisions for corporations under the CARES Act.

Characterization of Distributions

For income tax purposes, distributions paid consist of ordinary income and capital gains or a combination thereof. For the years ended December 31, 2020, 2019, and 2018 distributions paid per share were characterized as follows (unaudited):

	2020				2019				2018
	Amount		%		Amount		%		Amount		%
Common Stock
Ordinary income	$	0.0944	52.46	%	$	0.6132	85.16	%	$	0.7200	100.00	%
Capital gain distributions	—		—	%	0.1068		14.84	%	—		—	%
Return of capital	0.0856		47.54	%	—		—	%	—		—	%
Total	$	0.1800	100.00	%	$	0.7200	100.00	%	$	0.7200	100.00	%
Preferred Stock - Series C
Ordinary income	$	—	—	%	$	—	—	%	$	0.5393	100.00	%
Total	$	—	—	%	$	—	—	%	$	0.5393	100.00	%
Preferred Stock - Series D
Ordinary income	$	0.4031	25.00	%	$	1.3732	85.16	%	$	1.6125	100.00	%
Capital gain distributions	—		—	%	0.2393		14.84	%	—		—	%
Return of capital	1.2094		75.00	%	—		—	%	—		—	%
Total	$	1.6125	100.00	%	$	1.6125	100.00	%	$	1.6125	100.00	%
Preferred Stock - Series E
Ordinary income	$	0.3906	25.00	%	$	1.3307	85.16	%	$	1.5625	100.00	%
Capital gain distributions	—		—	%	0.2318		14.84	%	—		—	%
Return of capital	1.1719		75.00	%	—		—	%	—		—	%
Total	$	1.5625	100.00	%	$	1.5625	100.00	%	$	1.5625	100.00	%

The common dividends that were taxable to our stockholders in 2020 were 52.46% ordinary income and 47.54% return of capital. The 2020 Preferred D and Preferred E dividends were 25.0% ordinary income and 75.0% return of capital. The 2020 ordinary income dividends are eligible for the 20% deduction provided by Section 199A for qualified REIT dividends.

The dividends that were taxable to our stockholders in 2019 were 85.16% ordinary income and 14.84% capital gain distributions. The 2019 capital gain distribution was 100% related to unrecaptured Section 1250 gain. The 2019 ordinary income dividends are eligible for the 20% deduction provided by Section 199A for qualified REIT dividends.

The dividends that were taxable to our stockholders in 2018 were 100% ordinary income and were eligible for the 20% deduction provided by Section 199A for qualified REIT dividends.