INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 13 – INCOME TAXES

We have elected to be taxed as a REIT under the applicable provisions of the Code for every year beginning with the year ended December 31, 1999. We have also elected for certain of our subsidiaries to be treated as TRS entities, which are subject to federal, state and foreign income taxes. All entities other than the TRS entities are collectively referred to as the “REIT” within this note. Certain REIT entities are subject to foreign income tax.

Although we intend to continue to operate in a manner that will enable us to qualify as a REIT, such qualification depends upon our ability to meet, on a continuing basis, various distribution, stock ownership and other tests. Our tax treatment of distributions per common share was as follows:

	For the Years Ended December 31,
	2022		2021		2020
Tax treatment of distributions:
Ordinary income	$	—	$	—	$	—
Qualified ordinary income	0.04906		0.00330		0.00696
199A qualified business income	1.75094		1.25274		2.14381
Long-term capital gain	—		0.16448		0.28450
Unrecaptured Section 1250 gain	—		0.37948		0.04973
Non-dividend distribution	—		—		—
Distribution reported for 1099-DIV purposes	1.80000		1.80000		2.48500
Add: Dividend declared in current year and taxable in following year	0.45000		0.45000		0.45000
Less: Dividend declared in prior year and taxable in current year	(0.45000)		(0.45000)		(0.79250)
Distribution declared per common share outstanding	$	1.80000	$	1.80000	$	2.14250

We believe we have met the annual REIT distribution requirement by payment of at least 90% of our estimated taxable income for 2022, 2021 and 2020. Our consolidated expense (benefit) for income taxes was as follows (dollars in thousands):

	For the Years Ended December 31,
	2022		2021		2020
Current - Federal	$	(2,257)	$	662	$	402
Current - State	2,662		2,116		2,107
Deferred - Federal	338		6,431		(56,835)
Deferred - State	1,310		72		(35,447)
Current - Foreign	3,217		3,439		2,929
Deferred - Foreign	(22,196)		(7,893)		(9,690)
Total	$	(16,926)	$	4,827	$	(96,534)

The 2022 income tax benefit is primarily due to a $7.5 million income tax benefit from operating losses at certain TRS entities and an income tax benefit of $11.9 million from an internal restructuring of foreign TRS entities. The 2021 income tax expense is due to a $3.5 million deferred tax expense related to an internal restructuring of certain U.S. TRS entities, a $3.3 million deferred tax expense related to the revaluation of certain deferred tax liabilities as a result of enacted tax rate changes in the United Kingdom, and a $3.7 million deferred tax expense related to the release of certain residual tax effects from marketable debt securities. The 2020 income tax benefit was primarily due to a $95.9 million net deferred tax benefit from an internal restructuring of certain TRS entities, partially offset by a valuation allowance recorded against certain deferred tax assets.

Although the TRS entities and certain other foreign entities have paid minimal cash federal, state and foreign income taxes for the year ended December 31, 2022, their income tax liabilities may increase in future years as we exhaust net operating loss (“NOL”) carryforwards and as our senior living and other operations grow. Such increases could be significant.

A reconciliation of income tax expense and benefit, which is computed by applying the federal corporate tax rate for the years ended December 31, 2022, 2021 and 2020, to the income tax expense and benefit is as follows (dollars in thousands):

	For the Years Ended December 31,
	2022		2021		2020
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interest and income taxes	$	(19,733)	$	(34,127)	$	27,132
State income taxes, net of federal benefit	(5,411)		(8,256)		(1,967)
Change in valuation allowance from ordinary operations	53,117		59,572		86,359
Tax at statutory rate on earnings not subject to federal income taxes	(31,528)		(22,869)		(53,808)
Foreign rate differential and foreign taxes	123		4,405		3,342
Change in tax status of TRS	(1,961)		3,485		(150,287)
Other differences	(11,533)		2,617		(7,305)
Income tax (benefit) expense	$	(16,926)	$	4,827	$	(96,534)

Each TRS is a tax-paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities are summarized as follows (dollars in thousands):

	As of December 31,
	2022		2021		2020
Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs	$	(34,734)	$	(58,691)	$	(60,494)
Operating loss and interest deduction carryforwards	220,891		187,407		124,606
Expense accruals and other	16,723		21,628		10,516
Valuation allowance	(227,960)		(198,450)		(127,279)
Net deferred tax liabilities	$	(25,080)	$	(48,106)	$	(52,651)

Our net deferred tax liability decreased $23.0 million during 2022 primarily due to a $7.5 million impact from operating losses at certain TRS entities and the reversal of $11.9 million of deferred tax liabilities from an internal restructuring of foreign TRS entities. Our net deferred tax liability decreased $4.5 million during 2021 due to a $3.5 million deferred tax expense related to an internal restructuring of certain U.S. TRS entities, a $3.3 million deferred tax expense related to the revaluation of certain deferred tax liabilities as a result of enacted tax rate changes in the United Kingdom, and a $3.7 million deferred tax expense related to the release of certain residual tax effects from marketable debt securities. Our net deferred tax liability decreased $100.7 million during 2020 primarily due to a change in the tax status of certain of our TRS entities. This was offset by the recording of valuation allowances against $54.4 million of other deferred tax assets.

Due to uncertainty regarding the realization of certain deferred tax assets, we have established valuation allowances, primarily in connection with the NOL carryforwards related to certain TRSs. The amounts related to NOLs at the TRS entities for 2022, 2021 and 2020 are $171.0 million, $140.6 million and $83.2 million, respectively.

We are subject to corporate-level taxes (“built-in gains tax”) for any asset dispositions during the five year period immediately after the assets were owned by a C corporation (either prior to our REIT election, through stock acquisition or merger). The amount of income potentially subject to built-in gains tax is generally equal to the lesser of the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset or the actual amount of gain. Some, but not all, future gains could be offset by available NOL carryforwards.

At December 31, 2022, 2021 and 2020, the REIT had NOL carryforwards of $1.1 billion, $1.1 billion and $896.4 million, respectively. Additionally, the REIT has $10.8 million of federal income tax credits that were carried over from acquisitions. These amounts can be used to offset future taxable income (or taxable income for prior years if an audit determines that tax is owed), if any. The REIT will be entitled to utilize NOLs and tax credit carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid. Certain NOL and credit carryforwards are limited as to their utilization by Section 382 of the Code. The remaining REIT carryforwards begin to expire in 2023.

For the years ended December 31, 2022 and 2021, the net difference between tax bases and the reported amount of REIT assets and liabilities for federal income tax purposes was approximately $3.0 billion and $3.3 billion, respectively, less than the book bases of those assets and liabilities for financial reporting purposes.

Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the year ended December 31, 2019 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2018 and subsequent years. We are subject to audit generally under the statutes of limitation by the Canada Revenue Agency and provincial authorities with respect to the Canadian entities for the year ended December 31, 2018 and subsequent years. We are subject to audit in the United Kingdom generally for the periods ended in and subsequent to 2021.

The following table summarizes the activity related to our unrecognized tax benefits (dollars in thousands):

	2022		2021
Balance as of January 1	$	6,082	$	6,057
Additions to tax positions related to prior years	2		29
Subtractions to tax positions related to prior years	(256)		(4)
Balance as of December 31	$	5,828	$	6,082

Included in these unrecognized tax benefits of $5.8 million and $6.1 million at December 31, 2022 and 2021, respectively, were $5.0 million and $5.3 million of tax benefits at December 31, 2022 and 2021, respectively, that, if recognized, would reduce our annual effective tax rate. We accrued no interest or penalties related to the unrecognized tax benefits during 2022. We do not expect our unrecognized tax benefits to increase or decrease materially in 2023.

As a part of the transfer pricing structure in the normal course of business, the REIT enters into transactions with certain TRSs, such as leasing transactions, other capital financing and allocation of general and administrative costs, which transactions are intended to comply with the IRS and foreign tax authority transfer pricing rules.