Income Taxes

Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in the net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. A valuation allowance is recognized to reduce the deferred tax assets to the amount considered likely to be realized.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the "Tax Reform Act"). The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing limitations on net operating loss carryovers, and allowing dividend income from a REIT to be eligible for a 20% qualified business income deduction. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse. The provisional estimate of $31.7 million incorporates assumptions made based upon the best available interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.

For federal income tax purposes, the cash distributions to shareholders are characterized as follows:



	For the Years Ended December 31,
	2017		2016
Common distributions:
Ordinary income	73.0	%	87.0	%
Return of capital	27.0	%	—
Capital gains	—		13.0	%
	100.0	%	100.0	%

Preferred distributions:
Ordinary income	100.0	%	—
Return of capital	—		—
Capital gains	—		—
	100.0	%	—

The components of the income tax provision from continuing operations are as follows (in thousands):



	For the Years Ended December 31,
	2017			2016			2015
Current:
Federal	$	(67	)	$	(76	)	$	(287	)
State	(2,304		)	(1,113		)	(1,145		)
Deferred:
Federal	(43,181		)	(6,141		)	36,359
State	3,434			(860		)	4,199
Total net tax (expense) benefit	$	(42,118	)	$	(8,190	)	$	39,126

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income from continuing operations as a result of the following differences (in thousands):



	For the Years Ended December 31,
	2017			2016			2015
Expected federal tax expense at statutory rate	$	(41,593	)	$	(73,327	)	$	(63,240	)
Tax impact of REIT election	33,236			68,477			62,391
Expected tax expense at TRS	(8,357		)	(4,850		)	(849		)
Change in valuation allowance	366			(1,254		)	41,147
State income tax expense, net of federal	(1,388		)	(1,520		)	(1,111		)
Impact of rate change	(31,667		)	20			46
Other permanent items	(513		)	(382		)	(416		)
Impact of provision to return/deferred adjustments	(559		)	(204		)	309
Income tax (expense) benefit	$	(42,118	)	$	(8,190	)	$	39,126

A reconciliation of the Company's effective tax rate and the U.S. federal statutory income tax rate is as follows:



	For the Years Ended December 31,
	2017		2016		2015
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
Impact of REIT election	(28.0	)%	(32.7	)%	(34.5	)%
State and local income taxes	1.2	%	0.7	%	0.6	%
Change in valuation allowance	(0.3	)%	0.6	%	(22.8	)%
Impact of rate change	26.6	%	—	%	—	%
Other	0.9	%	0.3	%	—	%
Effective tax rate	35.4	%	3.9	%	(21.7	)%

Deferred income taxes represent the tax effect from continuing operations of the differences between the book and tax basis of the assets and liabilities. The deferred tax assets (liabilities) include the following (in thousands):



	December 31,
	2017			2016
Deferred tax liabilities:
Property and equipment	$	—		$	(8,557	)
Prepaid expenses	(1,501		)	(2,349		)
Intangible assets	(3,597		)	—
Deposits	(449		)	—
Other	—			(524		)
Deferred tax liabilities	$	(5,547	)	$	(11,430	)

Deferred tax assets:
Property and equipment	$	5,427		$	1,082
Incentive and vacation accrual	4,576			2,640
Deferred revenue - key money	1,095			1,703
Allowance for doubtful accounts	128			72
Partnership basis	918			—
Contingent liability	301			—
Other	357			605
Other carryforwards	184			155
Net operating loss carryforwards	64,546			49,787
Federal historic tax credit	824			—
Valuation allowance	(21,595		)	(11,430		)
Deferred tax assets	$	56,761		$	44,614

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is most likely to be utilized in future periods to offset taxable income. As of December 31, 2017 and 2016, the Company had a valuation allowance of approximately $21.6 million and $11.4 million, respectively, related to net operating loss ("NOL") carryforwards, historic tax credits, and other deferred tax assets of its TRSs. The Company considered all available evidence, both positive and negative, including cumulative income in recent years and its current forecast of future income in its analysis. While the Company believes its forecast of future income is reasonable, it is inherently uncertain. If the Company’s projections of future income are lower than expected, the Company may need to establish an additional valuation allowance.

The Company’s NOLs will begin to expire in 2024 for federal tax purposes and 2018 to 2031 for state tax purposes. Additionally, the annual utilization of these NOLs is limited pursuant to Section 382 of the Code. The Company's historic tax credits begin to expire in 2035. Additionally, the annual utilization of these tax credits is limited pursuant to Section 383 of the Code.

The Company is subject to examination by the U.S. Internal Revenue Service ("IRS") and various state jurisdictions. The tax years subject to examination vary by jurisdiction. With few exceptions, as of December 31, 2017, the Company is no longer subject to U.S. federal or state and local tax examinations by tax authorities for the years of 2013 and before. During 2016, the IRS commenced examination of the federal income tax return of the Company's primary TRS for the 2013 tax year. During 2017, the IRS extended the examination of the federal income tax returns of the Company's primary TRS for the 2014 and 2015 tax years. The Company anticipates the examination will be completed in 2018.

The Company had no accruals for tax uncertainties as of December 31, 2017 and 2016.