Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The Corporation's taxable income includes the taxable income of its wholly-owned subsidiaries and distribution income related to its 58% ownership of ESH REIT.

Income (loss) before income tax expense for the years ended December 31, 2019, 2018 and 2017 consists of the following (in thousands):


	Year Ended December 31, 2019		Year Ended December 31, 2018		Year Ended December 31, 2017
U.S.	$	194,143	$	254,172	$	244,995
Canada	310		(340)		(13,293)
Total	$	194,453	$	253,832	$	231,702

The components of income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands):


	Year Ended December 31, 2019		Year Ended December 31, 2018		Year Ended December 31, 2017
Federal (including foreign):
Current	$	28,297	$	31,401	$	49,307
Deferred	(6,697)		711		1,675
State:
Current	9,134		9,656		9,244
Deferred	(1,419)		308		(712)
Total	$	29,315	$	42,076	$	59,514

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, 2019, 2018 and 2017 are as follows (in thousands):


	Year Ended December 31, 2019						Year Ended December 31, 2018						Year Ended December 31, 2017
Tax at statutory rate	$	40,835	21.0	%	$	53,305	21.0	%	$	81,096	35.0	%
State income tax	5,844		3.0		7,847		3.1		5,578		2.4
Foreign income tax rate differential	—		—		—		—		(4,741)		(2.0)

Nontaxable ESH REIT income	(18,577)		(9.6)		(14,976)		(5.9)		(25,689)		(11.1)

Equity-based compensation	(69)		—		(524)		(0.2)		(263)		(0.1)
Other permanent differences	629		0.3		30		—		3,283		1.4
Estimate of future nontaxable distributions from ESH REIT	—		—		5,020		2.0		(2,054)		(0.9)
Change in ESH REIT temporary differences	475		0.3		(9,525)		(3.7)		(2,102)		(0.9)
Change in deferred tax rate⁽¹⁾	—		—		—		—		4,051		1.7
Valuation allowance	(1)		—		(2)		—		(427)		(0.2)
Tax credits	(783)		(0.4)		(661)		(0.3)		(497)		(0.2)
Other - net	962		0.5		1,562		0.6		1,279		0.6
Income tax expense - net	$	29,315	15.1	%	$	42,076	16.6	%	$	59,514	25.7	%

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(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, 2019 and 2018, consist of the following (in thousands):


	December 31, 2019		December 31, 2018
Deferred tax assets:
Net operating loss carryforwards	$	2,914	$	2,926
Accruals and allowances	19,484		10,861
Equity-based compensation	972		1,409
Depreciable property	2,890		3,211
Other	665		652
Total deferred tax assets	26,925		19,059
Valuation allowance	(2,914)		(2,926)
Net deferred tax assets	24,011		16,133
Deferred tax liabilities:
Undistributed ESH REIT income	(5,074)		(5,578)
Intangible assets	(2,112)		(2,600)
Prepaid expenses	(668)		(629)
Other	—		(17)
Total net deferred tax assets:	$	16,157	$	7,309

ESH REIT has elected to be taxed as 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. 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, 2019, 2018 and 2017, ESH REIT recognized a dividends paid deduction for 100% of its taxable income, incurring no federal income tax and minimal state and local income tax.

During the year ended 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 under the TCJA and recorded provisional deferred income tax expense of $4.1 million. The Company completed its accounting for all tax effects of the TCJA in 2018. During the year ended December 31, 2018, there was no material change from the provisional amount recorded during the year ended December 31, 2017.

ESH REIT had taxable income prior to distributions of $233.4 million, $297.2 million and $231.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. In 2019, ESH REIT made $240.6 million in cash distributions to its shareholders, excluding accumulated distributions on restricted stock settled, all of which were considered ordinary taxable income. The 2019 cash distributions included $26.5 million previously deducted in 2018 to fully offset 2018 taxable income. In 2018, ESH REIT made $277.1 million in cash distributions to its shareholders, excluding accumulated distributions on restricted stock settled, all of which were considered ordinary taxable income. The 2018 cash distributions included $2.8 million of distributions previously deducted in 2017 to fully offset 2017 taxable income. In 2017, ESH REIT made $235.1 million in cash distributions to its shareholders, excluding accumulated distributions on restricted stock settled, 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.

As of December 31, 2019, the book basis of ESH REIT’s property and equipment was $5.2 million greater than the tax basis.

As of December 31, 2019 and 2018, 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.

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 2016 to present may be subject to examination by the Internal Revenue Service and other taxing authorities. As of December 31, 2019, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for tax years 2014 through 2017. As this audit is 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, 2019.