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. The 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 that is 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 reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the net rate is enacted. 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.

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



	For the Years Ended December 31,
	2018		2017
Common distributions:
Ordinary income	60.0	%	73.0	%
Return of capital	—		27.0	%
Capital gains	34.0	%	—
Qualified dividend	6.0	%	—
	100.0	%	100.0	%

Preferred distributions:
Ordinary income	60.0	%	100.0	%
Return of capital	—		—
Capital gains	34.0	%	—
Qualified dividend	6.0	%	—
	100.0	%	100.0	%

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



	For the Years Ended December 31,
	2018			2017			2016
Current:
Federal	$	—		$	(67	)	$	(76	)
State	(2,209		)	(2,304		)	(1,113		)
Deferred:
Federal	(4,867		)	(43,181		)	(6,141		)
State	(1,717		)	3,434			(860		)
Income tax expense	$	(8,793	)	$	(42,118	)	$	(8,190	)

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



	For the Years Ended December 31,
	2018			2017			2016
Expected U.S. federal tax expense at statutory rate	$	(41,864	)	$	(41,593	)	$	(73,327	)
Tax impact of REIT election	35,058			33,236			68,477
Expected tax expense at TRS	(6,806		)	(8,357		)	(4,850		)
Change in valuation allowance	542			366			(1,254		)
State income tax expense, net of federal	(1,463		)	(1,388		)	(1,520		)
Impact of rate change	(51		)	(31,667		)	20
Other permanent items	(566		)	(513		)	(382		)
Impact of provision to return/deferred adjustments	(449		)	(559		)	(204		)
Income tax expense	$	(8,793	)	$	(42,118	)	$	(8,190	)

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



	For the Years Ended December 31,
	2018		2017		2016
Statutory U.S. federal income tax rate	21.0	%	35.0	%	35.0	%
Impact of REIT election	(17.6	)%	(28.0	)%	(32.7	)%
State and local income taxes	0.9	%	1.2	%	0.7	%
Change in valuation allowance	(0.3	)%	(0.3	)%	0.6	%
Impact of rate change	—	%	26.6	%	—	%
Other	0.6	%	0.9	%	0.3	%
Effective tax rate	4.6	%	35.4	%	3.9	%

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, 2018			December 31, 2017
Deferred tax liabilities:
Prepaid expenses	$	(1,298	)	$	(1,501	)
Intangible assets	(1,468		)	(3,597		)
Deposits	—			(449		)
Deferred tax liabilities	$	(2,766	)	$	(5,547	)

Deferred tax assets:
Property and equipment	$	2,639		$	5,427
Incentive and vacation accrual	4,595			4,576
Deferred revenue - key money	1,037			1,095
Allowance for doubtful accounts	156			128
Partnership basis	573			918
Contingent liability	298			301
Other	1,077			357
Other carryforwards	—			184
Net operating loss carryforwards	57,248			64,546
Federal historic tax credit	824			824
Valuation allowance	(21,052		)	(21,595		)
Deferred tax assets	$	47,395		$	56,761

Deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on the consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income, and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. 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, 2018 and 2017, the Company had a valuation allowance of approximately $21.1 million and $21.6 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 2019 to 2032 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 and local jurisdictions. The tax years subject to examination vary by jurisdiction. With few exceptions, as of December 31, 2018, the Company is no longer subject to U.S. federal or state and local tax examinations by tax authorities for the tax years of 2014 and before.

The Company had no accruals for tax uncertainties as of December 31, 2018 and 2017.