Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 9. Income Taxes

Federal and state income tax (expense) benefit relate to UPH. The federal and state income tax (expense) benefit for the years ended December 31, 2019 and 2018 is comprised of the following:

	For the Years Ended December 31,
Provision for income taxes	2019(1)			2018
Current:
Federal	$	(83,128	)	$	(147,896	)
State		(22,517	)		(63,286	)
Total current expense		(105,645	)		(211,182	)
Deferred:
Federal		51,371			217,743
State		14,525			54,202
Total deferred benefit		65,896			271,945
Total income tax (expense) benefit	$	(39,749	)	$	60,763

Explanatory Note:

(1) Represents the activity of UPH from January 1, 2019 to the IPO.

The effective tax rate before income taxes varies from the current statutory US Federal income tax rate as follows:

	For the Years Ended December 31,
	2019		2018
Tax expense at Federal statutory rates		21.0%		21.0%
Flow-through entities		6.2%		(15.7)%
REIT non-taxable income		(28.3)%		-
State taxes		(0.2)%		1.1%
Valuation allowance		(0.3)%		(11.3)%
Uncertain tax position ("FIN 48")		(1.1)%		(0.6)%
Total US Federal income tax rate		(2.7)%		(5.5)%

Significant components of the Predecessor's deferred tax assets (liabilities) are as follows:

	For the Year Ended December 31,
Provision for income taxes	2018
Deferred tax assets:
Net operating loss carryforward	$	1,299,997
Other assets		18,452
Accrued expenses		224,414
Total deferred tax assets		1,542,863
Valuation allowance		(1,189,133	)
Deferred tax assets, net of valuation allowance	$	353,730
Deferred tax liabilities:
Basis differential in carrying value of real estate assets	$	(1,147,577	)
Total deferred tax liability		(1,147,577	)
Deferred tax liability, net	$	(793,847	)

In connection with the IPO, the UPH $727,952 deferred tax liability at May 16, 2019 was reversed through equity. Deferred taxes have not been recorded with respect to the Company's acquired basis differences of UPH as a result of the IPO, the Company's election to be taxed as a REIT and the insignificant state effective tax rate for states that do not conform to federal taxation of REITs.

In connection with the IPO, the Company elected to treat PRM as a TRS which performs management services for properties the Company does not own. PRM generates income, resulting in Federal and state corporate income tax liability for these entities. For the twelve months ended December 31, 2019, income tax benefit related to PRM was zero.

As of December 31, 2019, the Company's consolidated balance sheets reflect a liability for unrecognized tax benefits in the amounts of $488,277, primarily related to the utilization of certain loss carryforwards by UPH through May 16, 2019. For the year ended December 31, 2019, the Company has accrued interest and penalties of $62,676. These balances are included in the consolidated balance sheets in accounts payable, accrued expenses and other liabilities. As of December 31, 2019, the Company estimates that unrecognized tax benefits may decrease by approximately $95,000 within twelve months of the balance sheet date due to expiring statutes of limitation. In connection with the IPO, the indirect sole shareholder of UPH agreed to reimburse the Company for unrecognized tax benefits. The Company recorded an indemnification asset in the same amount as the unrecognized tax benefits inclusive of accrued interest and penalties that existed as of the date of the IPO. Accordingly, the Company's unrecognized tax benefits, if recognized, would result in a decrease to the indemnification asset and have no impact on the effective tax rate. During the three months ended September 30, 2019, the Company reversed $191,391 of unrecognized tax benefits inclusive of interest and penalties due to the expiration of statute of limitations, with an offsetting adjustment to the indemnification asset.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

	For the Years Ended December 31,
	2019			2018
Gross unrecognized tax benefits, beginning of year	$	578,860		$	569,162
Additions based on tax positions taken in the current year		51,418			108,665
Decreases based on positions taken in prior year		(148,685	)		(98,967	)
Additions based on tax positions taken in prior periods		6,684			—
Total	$	488,277		$	578,860

The Company and PRM are subject to exam by federal and state and local tax authorities for the short tax year ended December 31, 2019. UPH is subject to exam by federal tax authorities for tax years 2016 through the short tax year ending May 16, 2019.

Cash paid for taxes for each of the years ended December 31, 2019 and 2018 was $0.02 million.