5. Income Taxes

Medical Properties Trust, Inc.

We have maintained and intend to maintain our election as a REIT under the Code, including the recently enacted Tax Reform law, H.R. 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 U.S. federal income taxes at regular corporate rates, including any applicable alternative minimum tax (eliminated for 2018 and future tax years). Taxable income from non-REIT activities managed through our TRS 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 expense (benefit) were as follows (in thousands):


	For the years ended December 31,
	2017			2016			2015
Current income tax (benefit) expense:
Domestic	$	(41	)	$	42		$	147
Foreign		3,062			1,856			1,614

		3,021			1,898			1,761
Deferred income tax (benefit) expense:
Domestic		(233	)		147			(360	)
Foreign		(107	)		(8,875	)		102

		(340	)		(8,728	)		(258	)

Income tax expense (benefit)	$	2,681		$	(6,830	)	$	1,503

A reconciliation of the income tax expense (benefit) 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, 2017, 2016, and 2015 is as follows (in thousands):


	2017			2016			2015
Income from continuing operations (before-tax)	$	293,919		$	219,108		$	141,430
Income tax at the US statutory federal rate (35%)		102,872			76,688			49,501
Increase (decrease) resulting from:
Foreign rate differential		(2,326	)		1,434			5,047
State income taxes, net of federal benefit		—			66			(601	)
Dividends paid deduction		(98,026	)		(84,927	)		(57,109	)
Equity investments		3,293			4,297			—
Change in valuation allowance		(5,391	)		(6,104	)		6,174
Other items, net		2,259			1,716			(1,509	)

Total income tax expense (benefit)	$	2,681		$	(6,830	)	$	1,503

The foreign income tax provision is based on foreign losses before income taxes of $0.1 million in 2017, $23.5 million in 2016, and $29.4 million in 2015.

The domestic income tax provision is based on income before income taxes of $13.9 million in 2017, a loss before income taxes of $1.4 million in 2016, and income before income taxes of $7.1 million in 2015 from our TRS.

At December 31, 2017 and 2016, components of our deferred tax assets and liabilities were as follows (in thousands):


	2017			2016
Deferred tax liabilities:
Property and equipment	$	(4,336	)	$	(3,781	)
Unbilled rent		(8,953	)		(7,045	)
Partnership investments		(2,099	)		(5,103	)
Other		(6,702	)		(6,757	)

Total deferred tax liabilities	$	(22,090	)	$	(22,686	)
Deferred tax assets:
Operating loss and interest deduction carry forwards	$	24,580		$	28,289
Other		8,726			10,085

Total deferred tax assets		33,306			38,374
Valuation allowance		(11,101	)		(15,975	)

Total net deferred tax assets	$	22,205		$	22,399

Net deferred tax asset (liability)	$	115		$	(287	)

At December 31, 2017, our U.S. net operating losses (“NOLs”) consisted of $68.2 million of federal NOLs and $51.4 million of state NOLs available as offsets to future years’ taxable income. We have federal and state capital loss carryforwards of $9.5 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, 2017. To the extent these alternative minimum tax credits exceed regular tax liability in tax years 2018 through 2020, 50% of the excess credit will be refunded. Any remaining alternative minimum tax credit will be refunded in 2021. At December 31, 2017, we had foreign NOLs of $23 million that may be carried forward indefinitely.

Valuation Allowance

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 (approximately $6.8 million) 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.

In 2016, we released $4 million of valuation allowances on our foreign deferred income tax assets due to a strong positive trend in foreign earnings and forecasted foreign income projections on the majority of our foreign entities. However, at December 31, 2016, there were still 11 foreign entities that did not have sufficient objective positive evidence to support a similar release in valuation allowances; thus, we continued to reserve against $2.2 million of related foreign deferred tax assets. For these 11 foreign entities and seven new entities formed in 2017, we evaluated the need for a valuation allowance on our foreign deferred income tax assets at December 31, 2017. 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. Based on our review of all positive and negative evidence, we concluded that a valuation allowance of $4.3 million should remain against certain foreign 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 and forecasted taxable income from operating activity.

We have no material uncertain tax position liabilities and related interest or penalties recorded at December 31, 2017.

REIT Status

We have met the annual REIT distribution requirements by payment of at least 90% of our estimated taxable income in 2017, 2016, and 2015. 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,
	2017		2016		2015
Common share distribution	$	0.950000	$	0.900000	$	0.870000
Ordinary income		0.655535		0.619368		0.769535
Capital gains(1)		0.021022		0.102552		—
Unrecaptured Sec. 1250 gain		0.004647		0.045432		—
Return of capital		0.273443		0.178080		0.100465

(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 U.S. 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.