Income Taxes

12 Months Ended

Dec. 31, 2018

INCOME TAXES

Income (loss) before income tax expense for the years ended December 31, 2018, 2017 and 2016 consists of the following (in thousands):



	Year Ended December 31, 2018			Year Ended December 31, 2017			Year Ended December 31, 2016
U.S.	$	254,172		$	244,995		$	196,557
Canada	(340		)	(13,293		)	1,146
Total	$	253,832		$	231,702		$	197,703

The components of income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



	Year Ended December 31, 2018		Year Ended December 31, 2017			Year Ended December 31, 2016
Federal (including foreign):
Current	$	31,401	$	49,307		$	51,495
Deferred	711		1,675			(23,377		)
State:
Current	9,656		9,244			8,831
Deferred	308		(712		)	(2,598		)
Total	$	42,076	$	59,514		$	34,351

The differences between income tax expense at the effective tax rate and the statutory U.S. federal income tax rate for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



	Year Ended December 31, 2018					Year Ended December 31, 2017					Year Ended December 31, 2016
Tax at statutory rate	$	53,305		21.0	%	$	81,096		35.0	%	$	69,196		35.0	%
State income tax	7,847			3.1		5,578			2.4		2,891			1.5
Foreign income tax rate differential	—			—		(4,741		)	(2.0	)	891			0.5
Nondeductible (nontaxable):
ESH REIT income	(14,976		)	(5.9	)	(25,689		)	(11.1	)	(34,132		)	(17.3	)
Change in expected distribution policy	—			—		—			—		(1,633		)	(0.8	)
Equity-based compensation	(524		)	(0.2	)	(263		)	(0.1	)	807			0.4
Other permanent differences	30			—		3,283			1.4		743			0.3
Estimate of future nontaxable distributions from ESH REIT	5,020			2.0		(2,054		)	(0.9	)	(8,461		)	(4.3	)
Change in ESH REIT temporary differences	(9,525		)	(3.7	)	(2,102		)	(0.9	)	3,917			2.0
Change in deferred tax rate⁽¹⁾	—			—		4,051			1.7		—			—
Valuation allowance	(2		)	—		(427		)	(0.2	)	981			0.5
Tax credits	(661		)	(0.3	)	(497		)	(0.2	)	(648		)	(0.3	)
Other - net	1,562			0.6		1,279			0.6		(201		)	(0.1	)
Income tax expense - net	$	42,076		16.6	%	$	59,514		25.7	%	$	34,351		17.4	%

________________________


(1)	Reflects the impact of the TCJA on Corporation deferred tax assets, specifically the remeasurement of deferred tax assets at December 31, 2017, using newly enacted tax rates, which resulted in deferred income tax expense.

The significant components of deferred tax assets and deferred tax liabilities as of December 31, 2018 and 2017, consist of the following (in thousands):



	December 31, 2018			December 31, 2017
Deferred tax assets:
Net operating loss carryforwards	$	2,926		$	2,900
Accruals and allowances	10,861			15,072
Equity-based compensation	1,409			1,603
Depreciable property	3,211			4,028
Other	652			426
Total deferred tax assets	19,059			24,029
Valuation allowance	(2,926		)	(2,900		)
Net deferred tax assets	16,133			21,129
Deferred tax liabilities:
Undistributed ESH REIT income	(5,578		)	(9,676		)
Intangible assets	(2,600		)	(2,545		)
Prepaid expenses	(629		)	(763		)
Other	(17		)	(20		)
Total net deferred tax assets (liabilities):	$	7,309		$	8,125

ESH REIT has elected to be taxed and expects to continue to qualify as a REIT under Sections 856 through 860 of the Code. A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding net capital gain, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.

As of December 31, 2018, the Company completed its accounting for all tax effects related to the TCJA. As of December 31, 2017, the Company estimated the remeasurement of its net deferred tax asset based on the newly enacted 21% federal corporate income tax rate and during the year ended December 31, 2017, recorded provisional deferred income tax expense of $4.1 million. This amount is no longer provisional and during the year ended December 31, 2018, there was no material change from the previously recorded provisional amount.

During the years ended December 31, 2018, 2017 and 2016, ESH REIT recognized a dividends paid deduction for 100% of its taxable income, incurring no federal income tax and minimal state and local income taxes.

ESH REIT had taxable income prior to distributions of $297.2 million, $231.6 million and $210.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. In 2018, ESH REIT made $277.8 million in cash distributions to its shareholders, $277.1 million of which were considered ordinary taxable income and $0.7 million which were accumulated distributions on restricted stock settled during the period. The 2018 cash distributions included $2.8 million previously deducted in 2017 to fully offset 2017 taxable income. In 2017, ESH REIT made $235.1 million in cash distributions to its shareholders, all of which were considered ordinary taxable income. The 2017 cash distributions included $6.2 million of distributions previously deducted in 2016 to fully offset 2016 taxable income. In 2016, ESH REIT made $280.9 million in cash distributions to its shareholders, all of which were considered ordinary taxable income. The 2016 cash distribution included a special distribution of $86.5 million paid in January 2016. In 2015, $77.1 million of the special distribution was deductible; the remaining $9.4 million was deductible in 2016.

As of December 31, 2018 and 2017, the Company recorded a valuation allowance related to the net operating loss carryforwards of its Canadian Operating Lessee and state net operating losses of ESH REIT. The Company has concluded that, in light of available evidence, it is more likely than not that these net operating loss carryforwards will not be realized.

As of December 31, 2018, the book basis of ESH REIT’s property and equipment was $21.9 million greater than the tax basis.

The Company evaluates its open tax positions using the criteria established by ASC 740, Income Taxes. The Company has concluded that it has not taken any material tax positions that are not more likely than not to be sustained upon examination and has therefore not recorded any reserves for uncertain tax positions. The Company’s federal income tax returns for the years 2015 to present are subject to examination by the Internal Revenue Service and other taxing authorities.

As of December 31, 2018, Extended Stay America, Inc. was under examination by the Internal Revenue Service for the tax year ending December 31, 2016. As of December 31, 2018, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for tax years 2014 through 2017. As these audits are still in process, the timing of the resolution and any payments that may be required cannot be determined at this time. The Company believes that, to the extent a liability may exist, it is appropriately reserved as of December 31, 2018.

ESH REIT

Entity Information [Line Items]

Income Taxes

INCOME TAXES

Income (loss) before income tax expense for the years ended December 31, 2018, 2017 and 2016 consists of the following (in thousands):



	Year Ended December 31, 2018			Year Ended December 31, 2017			Year Ended December 31, 2016
U.S.	$	231,266		$	231,093		$	207,896
Canada	(340		)	(14,880		)	4,362
Total	$	230,926		$	216,213		$	212,258

The components of income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



	Year Ended December 31, 2018			Year Ended December 31, 2017			Year Ended December 31, 2016
Federal (including foreign):
Current	$	715		$	4,792		$	1,195
Deferred	—			(3,377		)	549
State:
Current	97			170			(1,715		)
Deferred	(15		)	(356		)	22
Total	$	797		$	1,229		$	51

The differences between income tax expense at the effective tax rate and the statutory U.S. federal income tax rate for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



	Year Ended December 31, 2018					Year Ended December 31, 2017					Year Ended December 31, 2016
Tax at statutory rate	$	48,494		21.0	%	$	75,675		35.0	%	$	74,290		35.0	%
State income tax	82			—		(272		)	(0.1	)	(1,834		)	(0.9	)
Foreign income tax rate differential	—			—		(5,149		)	(2.4	)	1,872			0.9
Nondeductible (nontaxable):
ESH REIT income	(48,116		)	(20.8	)	(71,304		)	(33.0	)	(73,581		)	(34.6	)
Change in expected distribution policy	—			—		—			—		(2,243		)	(1.0	)
Other permanent differences	(378		)	(0.2	)	1,925			0.9		(602		)	(0.3	)
Other - net	715			0.3		354			0.2		2,149			1.0
Income tax expense - net	$	797		0.3	%	$	1,229		0.6	%	$	51		0.1	%

The significant components of deferred tax assets and deferred tax liabilities as of December 31, 2018 and 2017, consist of the following (in thousands):



	December 31, 2018			December 31, 2017
Deferred tax assets:
Net operating loss carryforwards	$	787		$	775
Other	1			2
Total deferred tax assets:	788			777
Valuation allowance	(787		)	(775		)
Net deferred tax assets:	1			2
Deferred tax liabilities:
Depreciable property	(10		)	(24		)
Other	(11		)	(26		)
Total net deferred tax liabilities:	$	(20	)	$	(48	)

ESH REIT has elected to be taxed and expects to continue to qualify as a REIT under Sections 856 through 860 of the Code. A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding net capital gain to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.

During the years ended December 31, 2018, 2017 and 2016, ESH REIT recognized a dividend paid deduction for 100% of its taxable income, incurring no federal income tax and minimal state and local income taxes. As discussed in Note 4, during 2017, ESH REIT disposed of substantially all of its Canadian assets, resulting in a gain for tax purposes, upon which it paid $4.5 million of current period income tax.

ESH REIT had taxable income prior to distributions of $297.2 million, $231.6 million and $210.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. In 2018, ESH REIT made $277.8 million in cash distributions to its shareholders, $277.1 million of which were considered ordinary taxable income and $0.7 million which were accumulated distributions on restricted stock settled during the period. The 2018 cash distributions included $2.8 million previously deducted in 2017 to fully offset its 2017 taxable income. In 2017, ESH REIT made $235.1 million in cash distributions to its shareholders, all of which were considered ordinary taxable income. The 2017 cash distributions included $6.2 million of distributions previously deducted in 2016 to fully offset 2016 taxable income. In 2016, ESH REIT made $280.9 million in cash distributions to its shareholders, all of which were considered ordinary taxable income. The 2016 cash distributions included a special distribution of $86.5 million paid in January 2016. In 2015, $77.1 million of the special distribution was deductible; the remaining $9.4 million was deductible in 2016.

As of December 31, 2018, the book basis of ESH REIT’s property and equipment was $21.9 million greater than the tax basis.

ESH REIT evaluates its open tax positions using the criteria established by ASC 740, Income Taxes. ESH REIT has concluded that it has not taken any material tax positions that are not more likely than not to be sustained upon examination and has therefore not recorded any reserves for uncertain tax positions. ESH REIT’s federal income tax returns for the years 2015 to present are subject to examination by the Internal Revenue Service and other taxing authorities.

As of December 31, 2018, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for tax years 2014 through 2017. As the audit is still in process, the timing of the resolution and any payments that may be required cannot be determined at this time. ESH REIT believes that, to the extent a liability may exist, it is appropriately reserved as of December 31, 2018.