INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXES

INCOME TAXES

11. INCOME TAXES

For 2019, 2018, and 2017, 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, 2019, 2018 and 2017 (unaudited):

	Year Ended December 31,
	2019		2018		2017
Ordinary income	$	0.981	$	0.774	$	1.018
Qualified ordinary income		0.004		0.006		0.011
Long-term capital gain		0.021		0.058		0.133
Unrecaptured section 1250 gain		0.063		0.233		0.063
Nondividend distributions		0.281		0.207		—
Total	$	1.350	$	1.278	$	1.225

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, 2019, 2018, and 2017 (dollars in thousands):

	Year Ended December 31,
	2019		2018		2017
Income tax (benefit)/provision
Current
Federal	$	1,466	$	220	$	(1,205)
State		735		396		407
Total current		2,201		616		(798)
Deferred
Federal		1,266		66		568
State		371		6		(10)
Total deferred		1,637		72		558
Total income tax (benefit)/provision	$	3,838	$	688	$	(240)
Classification of income tax (benefit)/provision:
Continuing operations	$	3,838	$	688	$	(240)

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, 2019, 2018, and 2017 (dollars in thousands):

	Year Ended December 31,
	2019		2018		2017
Deferred tax assets:
Federal and state tax attributes	$	22	$	28	$	8
Other		87		70		139
Total deferred tax assets		109		98		147
Valuation allowance		(19)		(16)		(9)
Net deferred tax assets		90		82		138
Deferred tax liabilities:
Book/tax depreciation and basis		(367)		—		—
Other investment ventures		(1,291)		(17)		—
Other		(67)		(67)		(67)
Total deferred tax liabilities		(1,725)		(84)		(67)
Net deferred tax assets/(liabilities)	$	(1,635)	$	(2)	$	71

Income tax provision/(benefit), net from our TRS differed from the amounts computed by applying the U.S. statutory rate of 21% to pretax income/(loss) for the years ended December 31, 2019, and 2018 and 35% for the year ended 2017 as follows (dollars in thousands):

	Year Ended December 31,
	2019		2018		2017
Income tax provision/(benefit)
U.S. federal income tax provision/(benefit)	$	2,905	$	321	$	581
State income tax provision		1,013		527		493
Other items		(139)		(167)		(188)
New tax law benefit		—		—		(1,129)
ITC basis adjustment		56		—		—
Valuation allowance		3		7		3
Total income tax provision/(benefit)	$	3,838	$	688	$	(240)

As of December 31, 2019, the Company had federal net operating loss carryovers (“NOL”) of $27.1 million expiring in 2032 through 2035 and state NOLs of $68.1 million expiring in 2020 through 2032. A portion of these attributes are still available to the subsidiary REITs, but are carried at a zero effective tax rate.

The Company’s Tax benefit/(provision), net was $(3.8) million and $(0.7) million for the years ended December 31, 2019 and 2018, respectively. The increase of $3.1 million was primarily attributable to a $2.0 million tax on a promoted interest and by $1.3 million on unrealized gains related to other investment ventures. 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 Tax benefit/(provision), net. As of December 31, 2019 and 2018, 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 2014. The tax years 2016 through 2018 remain open to examination by the major taxing jurisdictions to which the Company is subject.