INCOME TAXES

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Corporation’s taxable income includes the taxable income of its wholly-owned subsidiaries and distribution income related to its ownership of 59% of ESH REIT.

ESH REIT has elected to be taxed as and expects to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (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. 

The Company recorded a provision for federal, state and foreign income taxes of approximately $1.1 million for the three months ended March 31, 2020, an effective tax rate of approximately 12.4%, as compared with a provision of approximately $6.1 million for the three months ended March 31, 2019, an effective tax rate of approximately 17.7%. The Company's effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT's status as a REIT under the provisions of the Code and, specifically during the three months ended March 31, 2020, due to the ability of the Company to carry back and utilize projected losses to higher tax rate years. The decrease in the Company's effective tax rate is substantially due to circumstances caused by business disruption from the COVID-19 pandemic. As of March 31, 2020, the Company projects a taxable loss for the year ending December 31, 2020, and due to the passage of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), the Company is able to carry back the projected loss and fully utilize it in a higher tax rate year, providing an expected federal tax benefit. The expected federal tax benefit due to the projected loss for the year ending December 31, 2020, corresponded to a decrease in the effective tax rate used to measure income tax expense recognized for the three months ended March 31, 2020.

As of March 31, 2020, the Company has not completed its accounting for all tax effects related to the enactment of the CARES Act, including the ability to carry back losses to higher federal marginal rate tax years. The Company is still analyzing the CARES Act and refining its calculations, including the CARES Act's impact on state income taxes, all of which are complex and subject to continued interpretation. The Company expects to complete its analysis prior to year-end 2020.

The Company's income tax returns for the years 2016 to present are subject to examination by the Internal Revenue Service ("IRS") and other taxing authorities. As of March 31, 2020, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for the tax years 2014 through 2017. As the examination 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