5. Income Taxes

Medical Properties Trust, Inc.

We have maintained and intend to maintain our election as a REIT under the 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 U.S. 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 TRSs is subject to applicable U.S. federal, state and local income taxes. Our international subsidiaries are also subject to income taxes in the jurisdictions in which they operate.

From our TRSs and our foreign operations, income tax (benefit) expense were as follows (in thousands):


	For the years ended December 31,
	2016			2015			2014
Current income tax expense:
Domestic	$	42		$	147		$	114
Foreign		1,856			1,614			225

		1,898			1,761			339
Deferred income tax (benefit) expense:
Domestic		147			(360	)		(23	)
Foreign		(8,875	)		102			24

		(8,728	)		(258	)		1

Income tax (benefit) expense	$	(6,830	)	$	1,503		$	340

The foreign provision (benefit) for income taxes is based on foreign loss before income taxes of $23.5 million in 2016 as compared with foreign loss before income taxes of $29.4 million in 2015, and foreign loss before income taxes of $7.5 million in 2014.

The domestic provision (benefit) for income taxes is based on a loss before income taxes of $1.4 million in 2016 from our taxable REIT subsidiaries as compared with income before income taxes of $7.1 million in 2015, and a loss before income taxes of $20.9 million in 2014.

At December 31, 2016 and 2015, components of our deferred tax assets and liabilities were as follows (in thousands):


	2016			2015
Deferred tax liabilities:
Property and equipment	$	(3,781	)	$	(1,636	)
Unbilled rent		(7,045	)		(4,495	)
Partnership investments		(5,103	)		(3,362	)
Other		(6,757	)		(6,141	)

Total deferred tax liabilities	$	(22,686	)	$	(15,634	)
Deferred tax assets:
Operating loss and interest deduction carry forwards	$	28,289		$	19,016
Other		10,085			10,314

Total deferred tax assets		38,374			29,330
Valuation allowance		(15,975	)		(23,005	)

Total net deferred tax assets	$	22,399		$	6,325

Net deferred tax (liability)	$	(287	)	$	(9,309	)

At December 31, 2016, our U.S. net operating losses (“NOLs”) consisted of $60 million of federal NOLs and $113.5 million of state NOLs available as offsets to future years’ taxable income. We have federal and state capital loss carryforwards of $8.1 million. The NOLs primarily expire between 2021 and 2035 and the capital loss carryforward expires in 2022. We have alternative minimum tax credits of $0.3 million as of December 31, 2016, which may be carried forward indefinitely. At December 31, 2016, we had foreign NOLs of $13.3 million that may be carried forward indefinitely.

In the evaluation of the need for a valuation allowance on the U.S. deferred income tax assets, we considered all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, carryback of future period losses to prior periods, projected future taxable income, tax planning strategies and recent financial performance. Based on our review of all positive and negative evidence, including a three year U.S. cumulative pre-tax loss, we concluded that a valuation allowance should remain against those deferred income tax assets that are not expected to be realized through future sources of taxable income generated from scheduled reversals of deferred income tax liabilities. As a result, a valuation allowance continues to be recorded to reflect the portion of the U.S. federal and state deferred income tax assets that are not likely to be realized based upon all available evidence. If we later determine that we will more likely than not realize all, or a portion, of the deferred income tax assets, we will reverse the valuation allowance in a future period. All future reversals of the valuation allowance would result in a tax benefit in the period recognized.

We also evaluated the need for a valuation allowance on our foreign deferred income tax assets. In doing so, we considered all available evidence to determine whether it is more likely than not that the foreign deferred income tax assets will be realized. When comparing 2016 results to prior periods, we noted a significant increase in positive evidence, which included a strong positive trend in foreign earnings and forecasted foreign income projections in 2017 and future periods. For instance, several of our initial foreign subsidiaries achieved a cumulative pre-tax income position as of the 2016 fourth quarter, and we expect the majority of our remaining foreign subsidiaries to be in a cumulative pre-tax income position within the next 12-18 months. Current year earnings resulted in the use of $2 million of beginning of the year valuation allowances on deferred tax assets which offset corresponding current tax expense. The positive evidence noted above resulted in our conclusion to make a one-time release of $4 million of the valuation allowance on our foreign deferred income tax assets in the 2016 fourth quarter. We also noted that sufficient objective positive evidence did not exist for a portion of foreign deferred income tax assets at December 31, 2016 due to the lack of future sources of taxable income to utilize these deferred income tax assets. A valuation allowance of $2.2 million has remained to reserve against these foreign deferred tax assets.

We have no uncertain tax position liabilities and related interest or penalties recorded at December 31, 2016.

A reconciliation of the income tax (benefit) 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, 2016, 2015, and 2014 is as follows (in thousands):


	2016			2015			2014
Income from continuing operations (before-tax)	$	219,108		$	141,430		$	51,138
Income tax at the US statutory federal rate (35%)		76,688			49,501			17,898
Increase (decrease) resulting from:
Rate differential		1,434			5,047			1,145
State income taxes, net of federal benefit		66			(601	)		(337	)
Dividends paid deduction		(84,927	)		(57,109	)		(27,873	)
Equity investments		4,297			—			—
Change in valuation allowance		(6,104	)		6,174			8,988
Other items, net		1,716			(1,509	)		519

Total income tax (benefit) expense	$	(6,830	)	$	1,503		$	340

We have met the annual REIT distribution requirements by payment of at least 90% of our estimated taxable income in 2016, 2015, and 2014. 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,
	2016		2015		2014
Common share distribution	$	0.900000	$	0.870000	$	0.840000
Ordinary income		0.619368		0.769535		0.520692
Capital gains(1)		0.102552		—		0.000276
Unrecaptured Sec. 1250 gain		0.045432		—		0.000276
Return of capital		0.178080		0.100465		0.319032

(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 TRSs 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 TRSs and international operations.