Note 16. Income Taxes

We have elected on our U.S. federal income tax return for the taxable year ending December 31, 2015 to be treated as a REIT and thus have no provision for U.S. federal income tax related to activities of the REIT and its passthrough subsidiaries. The REIT and certain of its subsidiaries are subject to certain state and local income taxes, franchise taxes, and gross receipts taxes. Our TRSs are subject to U.S. federal, state and local corporate income taxes.

Income tax expense (benefit) for the year ended December 31, 2016 and for the period from April 24, 2015 to December 31, 2015 as reported in the accompanying Consolidated Statement of Income was comprised of the following:

	Year Ended			Period from
(Thousands)	December 31, 2016			April 24 - December 31, 2015
Current
Federal	$	1,596		$	1,208
State		1,107			741
Total current expense		2,703			1,949

Deferred
Federal		(1,488	)		(770	)
State		(698	)		(441	)
Total deferred expense		(2,186	)		(1,211	)
Total income tax expense	$	517		$	738

An income tax expense reconciliation between the U.S. statutory tax rate and the effective tax rate is as follows:

	Year Ended			Period from
(Thousands)	December 31, 2016			April 24 - December 31, 2015
Income from continuing operations, before tax	$	305		$	24,795
Income tax at U.S. statutory federal rate		107			8,665
Increases (decreases) resulting from:
State taxes, net of federal benefit		(224	)		266
Benefit of REIT status		(4,016	)		(8,193	)
Capitalized transaction costs		(3,915	)		-
Change in valuation allowance		8,176			-
Adjustment of deferred tax balances		149			-
Permanent differences		52			-
Rate differential		188			-
Income tax expense	$	517		$	738

The effective tax rate on income from continuing operations differs from tax at the statutory rate primarily due to our status as a REIT, certain capitalized costs incurred to acquire assets that were transferred to a TRS, and changes in valuation allowance related to deferred tax assets of a TRS.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

The components of the Company's deferred tax assets and liabilities are as follows:

(Thousands)	December 31, 2016			December 31, 2015
Deferred tax assets:
Deferred revenue	$	4,244		$	90
Accrued bonuses		520			-
Goodwill		1,886			-
Stock based compensation		179			-
Accrued expenses and other		802			-
Asset retirement obligation		790			-
Inventory reserve		401			-
Net operating loss carryforwards		39,916			-
Deferred tax assets		48,738			90
Valuation allowance		(8,176	)		-
Deferred tax assets, net of valuation allowance		40,562			90

Deferred tax liabilities:
Property, plant & equipment	$	(20,923	)	$	(1,759	)
Customer list intangible		(47,721	)		(4,045	)
Other intangible amortization		(137	)		-
Other		(175	)		-
Deferred tax liabilities	$	(68,956	)	$	(5,804	)

Deferred tax asset (liability), net	$	(28,394	)	$	(5,714	)

A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount that we believe is more likely than not to be realized. The valuation allowance at December 31, 2016 primarily relates to net operating loss carryforwards (“NOL”s) of one of our TRSs.

On August 31, 2016 we acquired 100% of the outstanding equity of Tower Cloud, Inc., which had federal NOL carryforwards of approximately $81.2 million at the date of the acquisition that will expire between 2026 and 2036. As a result of the change in ownership, the utilization of Tower Cloud, Inc. NOL carryforwards is subject to limitations imposed by the Internal Revenue Code. The gross deferred tax assets associated with the NOL and other temporary differences as of August 31, 2016 were approximately $37.0 million, with respect to which we determined that a valuation allowance is not required. A net deferred tax liability of $24.8 million was recorded in connection with the acquisition, which is primarily related to the excess of the recorded amounts for Property, Plant & Equipment and Intangible Assets over their respective historical tax bases.

We have total federal NOL carryforwards as of December 31, 2016 of approximately $102.9M which will expire between 2026 and 2036.

The Company has no liability for unrecognized tax benefits or tax-related penalties or interest at December 31, 2016 and does not expect a significant change in the balance of unrecognized tax benefits within the next 12 months. With the exception of Tower Cloud, Inc., our 2015 returns remain open to examination. As Tower Cloud, Inc. has NOLs available to carry forward, the applicable tax years will generally remain open to examination several years after the applicable loss carryforwards have been utilized or expire.