INCOME TAXES

For 2014, 2013, and 2012, UDR believes that we have complied with the REIT requirements specified in the Code. As such, the REIT would generally not be subject to federal income taxes.

For income tax purposes, distributions paid to common stockholders may consist of ordinary income, qualified dividends, capital gains, unrecaptured section 1250 gains, return of capital, or a combination thereof. Distributions that exceed our current and accumulated earnings and profits constitute a return of capital rather than taxable income and reduce the stockholder’s basis in their common shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the stockholder’s basis in the common shares, it generally will be treated as a gain from the sale or exchange of that stockholder’s common shares. Taxable distributions paid per common share were taxable as follows for the years ended December 31, 2014, 2013, and 2012:



	Year Ended December 31,
	2014		2013		2012
Ordinary income	$	0.695	$	0.744	$	0.174
Qualified ordinary income	0.139		—		—
Long-term capital gain	0.105		0.114		0.186
Unrecaptured section 1250 gain	0.076		0.067		0.515
Total	$	1.015	$	0.925	$	0.875

We have a TRS that is subject to federal and state income taxes. A TRS is a C-corporation which has not elected REIT status and as such is subject to United States federal and state income tax. The components of the provision for income taxes are as follows for the years ended December 31, 2014, 2013, and 2012 (dollars in thousands):



	Year Ended December 31,
	2014			2013			2012
Income tax (benefit)/expense
Current
Federal	$	147		$	(1,030	)	$	1,961
State	550			846			1,463
Total current	697			(184		)	3,424
Deferred
Federal	20,138			(6,907		)	(21,479		)
State	5,159			(1,190		)	(3,021		)
Total deferred	25,297			(8,097		)	(24,500		)
Total income tax (benefit)/expense	$	25,994		$	(8,281	)	$	(21,076	)
Classification of income tax (benefit)/expense
Continuing operations	$	(15,098	)	$	(7,299	)	$	(30,717	)
Gain/(loss) on sale of real estate owned	41,087			—			—
Discontinued operations	5			(982		)	9,641

Deferred income taxes are provided for the change in temporary differences between the basis of certain assets and liabilities for financial reporting purposes and income tax reporting purposes. The expected future tax rates are based upon enacted tax laws. The components of our TRS deferred tax assets and liabilities are as follows for the years ended December 31, 2014, 2013, and 2012 (dollars in thousands):



	Year Ended December 31,
	2014			2013			2012
Deferred tax assets:
Federal and state tax attributes	$	—		$	13,069		$	1,464
Book/tax depreciation	6,692			19,354			12,345
Construction capitalization differences	75			—			6,635
Investment in partnerships	—			—			3,112
Debt and interest deductions	—			10,311			—
Other	401			—			2,009
Total deferred tax assets	7,168			42,734			25,565
Valuation allowance	—			(1,310		)	(1,390		)
Net deferred tax assets	7,168			41,424			24,175
Deferred tax liabilities:
Construction capitalization differences	—			(3,766		)	—
Investment in partnerships	—			(5,080		)	—
Other	(192		)	(305		)	—
Total deferred tax liabilities	(192		)	(9,151		)	—
Net deferred tax asset	$	6,976		$	32,273		$	24,175

Income tax benefit/(expense), net differed from the amounts computed by applying the U.S. statutory rate of 35% to pretax income/(loss) for the years ended December 31, 2014, 2013, and 2012 as follows (dollars in thousands):



	Year Ended December 31,
	2014			2013			2012
Income tax (benefit)/expense
U.S. federal income tax (benefit)/expense	$	28,819		$	(8,493	)	$	21,853
State income tax provision	2,678			46			2,497
Other items	(137		)	246			(1,682		)
Conversion of certain TRS entities to REITs	(5,770		)	—			—
Valuation allowance	404			(80		)	(43,744		)
Total income tax (benefit)/expense	$	25,994		$	(8,281	)	$	(21,076	)

As of December 31, 2014, the Company, through our TRS, had federal net operating loss carryovers (“NOL”) of $19.5 million expiring in 2032 through 2033. As of December 31, 2014, the TRS had state NOLs of approximately $57.8 million expiring in 2020 through 2031. Prior to the conversion adjustment, as of December 31, 2014, the Company had a valuation allowance of $1.7 million against its state NOL. During the year ended December 31, 2014, the Company had a net change of $400,000 in the valuation allowance. These attributes are still available to the new REITs, but are carried at a zero effective tax rate.

For the year ended December 31, 2014, the Tax benefit/(provision), net increased $7.8 million as compared to 2013. The increase was primarily a result of the Company recognizing a one-time tax benefit of $5.8 million in 2014 related to the conversion of certain taxable REIT subsidiary entities into REITs. Additionally, Gain/(loss) on sale of real estate owned, net of tax included approximately $41.1 million of tax.

GAAP defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The financial statements reflect expected future tax consequences of income tax positions presuming the taxing authorities’ full knowledge of the tax position and all relevant facts, but without considering time values. GAAP also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.

The Company evaluates our tax position using a two-step process. First, we determine whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company will then determine the amount of benefit to recognize and record the amount of the benefit that is more likely than not to be realized upon ultimate settlement. When applicable, UDR recognizes interest and/or penalties related to uncertain tax positions in income tax expense. As of December 31, 2014 and 2013, UDR has no material unrecognized income tax benefits/(provisions).

The Company files income tax returns in federal and various state and local jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local income tax examination by tax authorities for years prior to 2010. The tax years 2010 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject.