5. Income Taxes

Medical Properties Trust, Inc.

We have maintained and intend to maintain our election as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of our taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax if we distribute 100% of our taxable income to our stockholders and satisfy certain other requirements. Income tax is paid directly by our stockholders on the dividends distributed to them. If our taxable income exceeds our dividends in a tax year, REIT tax rules allow us to designate dividends from the subsequent tax year in order to avoid current taxation on undistributed income. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax. Taxable income from non-REIT activities managed through our taxable REIT subsidiaries is subject to applicable United States federal, state and local income taxes. Our international subsidiaries are also subject to income taxes in the jurisdictions in which they operate.

From our taxable REIT subsidiaries and our foreign operations, we incurred income tax expenses as follows (in thousands):


	For the years ended December 31,
	2015			2014			2013
Current income tax expense:
Domestic	$	147		$	114		$	358
Foreign		1,614			225			158

		1,761			339			516
Deferred income tax (benefit) expense:
Domestic		(360	)		(23	)		210
Foreign		102			24			—

		(258	)		1			210

Income tax expense	$	1,503		$	340		$	726

The foreign provision (benefit) for income taxes is based on foreign loss before income taxes of $29.4 million in 2015 as compared with foreign loss before income taxes of $7.5 million in 2014, and foreign loss before income taxes of $12.9 million in 2013.

The domestic provision (benefit) for income taxes is based on income before income taxes of $7.1 million in 2015 from our taxable REIT subsidiaries as compared with loss before income taxes of $20.9 million in 2014 from our taxable REIT subsidiaries, and income before income taxes of $7.6 million in 2013 from our taxable REIT subsidiaries.

At December 31, 2015 and 2014, components of our deferred tax assets and liabilities were as follows (in thousands):


	2015			2014
Deferred tax liabilities:
Property and equipment	$	(1,636	)	$	—
Unbilled rent		(4,495	)		(2,070	)
Partnership investments		(3,362	)		(3,468	)
Other		(6,141	)		(3,759	)

Total deferred tax liabilities	$	(15,634	)	$	(9,297	)
Deferred tax assets:
Operating loss and interest deduction carry forwards	$	19,016		$	19,546
Property and equipment		—			2,373
Other		10,314			3,971

Total deferred tax assets		29,330			25,890
Valuation allowance		(23,005	)		(16,831	)

Total net deferred tax assets	$	6,325		$	9,059

Net deferred tax (liability)	$	(9,309	)	$	(238	)

At December 31, 2015, we had U.S. federal and state NOLs of $41.4 million and $107.7 million, respectively, that expire in 2021 through 2034. At December 31, 2015, we had foreign NOLs of $10.8 million that may be carried forward indefinitely.

At December 31, 2015, we had U.S. federal alternative minimum tax credits of $0.3 million that may be carried forward indefinitely. At December 31, 2015, we had U.S. federal foreign tax credits of $0.6 million that expire in 2025.

In 2015, our valuation allowance increased by $6.2 million as a result of book losses sustained by our foreign subsidiaries as the result of significant acquisition expenses incurred. We believe (based on cumulative losses and potential of future taxable income) that we should reserve for our net deferred tax assets. We will continue to monitor this valuation allowance and, if circumstances change (such as entering into new transactions including working capital loans, equity investments, etc.), we will adjust this valuation allowance accordingly.

A reconciliation of the income tax expense at the statutory income tax rate and the effective tax rate for income from continuing operations before income taxes for the years ended December 31, 2015, 2014, and 2013 is as follows (in thousands):


	2015			2014			2013
Income from continuing operations (before-tax)	$	141,430		$	51,138		$	90,027

Income tax at the US statutory federal rate (35%)		49,501			17,898			31,509
Increase (decrease) resulting from:
Rate differential		5,047			1,145			2,380
State income taxes, net of federal benefit		(601	)		(337	)		271
Dividends paid deduction		(57,109	)		(27,873	)		(33,345	)
Change in valuation allowance		6,174			8,988			(697	)
Other items, net		(1,509	)		519			608

Total income tax expense	$	1,503		$	340		$	726

We have met the annual REIT distribution requirements by payment of at least 90% of our estimated taxable income in 2015, 2014, and 2013. Earnings and profits, which determine the taxability of such distributions, will differ from net income reported for financial reporting purposes due primarily to differences in cost basis, differences in the estimated useful lives used to compute depreciation, and differences between the allocation of our net income and loss for financial reporting purposes and for tax reporting purposes.

A schedule of per share distributions we paid and reported to our stockholders is set forth in the following:


	For the Years Ended December 31,
	2015		2014		2013
Common share distribution	$	0.870000	$	0.840000	$	0.800000
Ordinary income		0.769535		0.520692		0.599384
Capital gains(1)		—		0.000276		0.046380
Unrecaptured Sec. 1250 gain		—		0.000276		0.026512
Return of capital		0.100465		0.319032		0.154236
Allocable to next year		—		—		—

(1)	Capital gains include unrecaptured Sec. 1250 gains.

MPT Operating Partnership, L.P.

As a partnership, the allocated share of income of the Operating Partnership is included in the income tax returns of the general and limited partners. Accordingly, no accounting for income taxes is generally required for such income of the Operating Partnership. However, the Operating Partnership has formed taxable REIT subsidiaries on behalf of Medical Properties Trust, Inc., which are subject to federal, state and local income taxes at regular corporate rates, and its international subsidiaries are subject to income taxes in the jurisdictions in which they operate. See discussion above under Medical Properties Trust, Inc. for more details of income taxes associated with our taxable REIT subsidiaries and international operations.