INCOME TAXES

12 Months Ended

Dec. 31, 2022

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 corporate 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 Pandemic and its adverse, long-term effect on our lodging operations, certain of our TRSs have incurred operating losses and are in a three-year cumulative loss. As such, the realizability of our deferred tax assets at December 31, 2022 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all of our deferred tax assets at December 31, 2022.

The components of income tax expense (benefit) for the years ended December 31, 2022, 2021, and 2020 are as follows (in thousands):

	2022		2021		2020
Current:
Federal	$	1,953	$	1,036	$	(904)
State and local	1,717		456		224
Deferred:
Federal	(59)		(19)		1,548
State and local	—		—		508
Income tax expense	$	3,611	$	1,473	$	1,376

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:

	2022		2021		2020
Statutory federal income tax provision	$	1,014	$	(14,093)	$	(31,052)
Nontaxable income of the REITs	1,124		16,812		19,963
State income taxes, net of federal tax benefit	1,644		891		(3,079)
Provision to return and deferred adjustment	81		—		(16)
Effect of permanent differences and other	246		99		319
Deferred assets transferred with REIT stock sale	730		—		—
Change in valuation allowance	(1,228)		(2,236)		15,241
Income tax provision	$	3,611	$	1,473	$	1,376

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, 2022, 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 was recorded against substantially all of our deferred tax assets at December 31, 2022.

At December 31, 2022 and 2021, we had valuation allowances of $11.8 million and $13.0 million, respectively. The $1.2 million decrease in valuation allowance relates to decreases in deferred tax assets related to $0.7 million in deferred assets transferred with the sale of subsidiary REIT stock, $0.3 million related to utilization of net operating losses, and $0.2 million decrease related to accrued expenses.

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

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

 

	2022		2021
Tax carryforwards	$	10,312	$	11,251
Accrued expenses	1,421		1,704
Other	124		71
Valuation allowance	(11,777)		(13,005)
Net deferred tax assets	$	80	$	21
Gross deferred tax assets	$	11,883	$	13,066
Gross deferred tax liabilities	(26)		(40)
Valuation allowance	(11,777)		(13,005)
Net deferred tax assets	$	80	$	21

At December 31, 2022, our TRSs had federal net operating losses of $37.7 million which are not subject to expiration and state net operating losses of $37.2 million, which expire beginning in 2025. At December 31, 2022, Summit Hotel Properties Inc. and our Subsidiary REITs had federal net operating loss carryforwards of $35.7 million and $2.5 million, respectively, which are not subject to expiration.

In the normal course of business, we are subject to examination by federal, state, and local jurisdictions where applicable. We had no unrecognized tax benefits at December 31, 2022 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, 2022. We have no material interest or penalties relating to unrecognized tax benefits in the Consolidated Statements of Operations for the years ended December 31, 2022, 2021 or 2020 or in the Consolidated Balance Sheets as of December 31, 2022 or 2021.

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 2018.

Characterization of Distributions (Unaudited)

For income tax purposes, distributions paid consist of ordinary income and capital gains or a combination thereof. For the years ended December 31, 2022, 2021, and 2020 distributions paid per share were characterized as follows:

	2022				2021				2020
	Amount		%		Amount		%		Amount		%
Common Stock
Ordinary non-qualified dividend income	$	0.0471	58.82	%	$	—	—	%	$	0.0944	52.46	%
Ordinary qualified dividend income	0.0106		13.26	%	—		—	%	—		—	%
Capital gain distributions	0.0223		27.92	%	—		—	%	—		—	%
Return of capital	—		—	%	—		—	%	0.0856		47.54	%
Total	$	0.0800	100.00	%	$	—	—	%	$	0.1800	100.00	%
Preferred Stock - Series D
Ordinary non-qualified dividend income	$	—	—	%	$	—	—	%	$	0.4031	25.00	%
Capital gain distributions	—		—	%	—		—	%	—		—	%
Return of capital	—		—	%	1.2228		100.00	%	1.2094		75.00	%
Total	$	—	—	%	$	1.2228	100.00	%	$	1.6125	100.00	%
Preferred Stock - Series E
Ordinary non-qualified dividend income	$	0.9191	58.82	%	$	—	—	%	$	0.3906	25.00	%
Ordinary qualified dividend income	0.2072		13.26	%	—		—	%	—		—	%
Capital gain distributions	0.4363		27.92	%	—		—	%	—		—	%
Return of capital	—		—	%	1.5625		100.00	%	1.1719		75.00	%
Total	$	1.5625	100.00	%	$	1.5625	100.00	%	$	1.5625	100.00	%
Preferred Stock - Series F
Ordinary non-qualified dividend income	$	0.8639	58.82	%	$	—	—	%	$	—	—	%
Ordinary qualified dividend income	0.1947		13.26	%	—		—	%	—		—	%
Capital gain distributions	0.4101		27.92	%	—		—	%	—		—	%
Return of capital	—		—	%	0.4406		100.00	%	—		—	%
Total	$	1.4687	100.00	%	$	0.4406	100.00	%	$	—	—	%

The dividends that were distributed to our stockholders during the year ended December 31, 2022 were 58.82% ordinary non-qualified dividend income, 13.26% ordinary qualified dividend income, and 27.92% capital gain distributions. The 2022 ordinary non-qualified dividends are eligible for the 20% deduction provided by Section 199A for qualified REIT dividends.

The Preferred D, Preferred E and Preferred F dividends paid during the year ended December 31, 2021 were 100.0% return of capital.

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 25.00% ordinary income and 75.00% return of capital. The 2020 ordinary income dividends are eligible for the 20% deduction provided by Section 199A for qualified REIT dividends.