Income Taxes and Distributions

12 Months Ended

Dec. 31, 2017

Income Taxes and Distributions [Abstract]

18. Income Taxes and Distributions

We elected to be taxed as a REIT commencing with our first taxable year. To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income are also subject to a 4% federal excise tax. The main differences between net income for federal income tax purposes and consolidated financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.

Cash distributions paid to common stockholders, for federal income tax purposes, are as follows for the periods presented:


			Year Ended December 31,
			2017		2016		2015
Per Share:
	Ordinary income	$	1.8117	$	2.5067	$	1.9134
	Qualified dividend*		0.0038		0.0047		0.0529
	Return of capital		0.0929		0.0573		0.0503
	Long-term capital gains		1.5750		0.4593		0.9352
	Unrecaptured section 1250 gains*		0.3557		0.4120		0.3482
	Totals	$	3.4800	$	3.4400	$	3.3000

	*Informational purposes only

Our consolidated provision for income tax expense (benefit) is as follows for the periods presented (in thousands):


		Year Ended December 31,
		2017		2016		2015
Current	$	7,633	$	14,944	$	10,177
Deferred		12,495		(34,072)		(3,726)
Totals	$	20,128	$	(19,128)	$	6,451

REITs generally are not subject to U.S. federal income taxes on that portion of REIT taxable income or capital gain that is distributed to stockholders. For the tax year ended December 31, 2017, as a result of acquisitions located in Canada and the U.K., we were subject to foreign income taxes under the respective tax laws of these jurisdictions.

The provision for income taxes for the year ended December 31, 2017 primarily relates to state taxes, foreign taxes, and taxes based on income generated by entities that are structured as TRSs. For the tax years ended December 31, 2017, 2016 and 2015, the foreign tax provision/(benefit) amount included in the consolidated provision for income taxes was $4,806,000, ($3,315,000) and $7,385,000, respectively.

A reconciliation of income taxes, which is computed by applying the federal corporate tax rate for the years ended December 31, 2017, 2016 and 2015, to the income tax expense/(benefit) is as follows for the periods presented (in thousands):


		Year Ended December 31,
		2017		2016		2015
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interests and income taxes	$	199,588	$	372,030	$	313,250
Increase (decrease) in valuation allowance⁽¹⁾		30,445		(2,128)		13,759
Tax at statutory rate on earnings not subject to federal income taxes		(234,468)		(399,571)		(319,832)
Foreign permanent depreciation		10,065		9,205		7,500
Other differences		14,498		1,336		(8,226)
Totals	$	20,128	$	(19,128)	$	6,451

(1) Excluding purchase price accounting.

Each TRS and foreign entity subject to income taxes is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of taxable and deductible temporary differences, as well as tax asset/(liability) attributes, are summarized as follows for the periods presented (in thousands):


		Year Ended December 31,
		2017		2016		2015
Investments and property, primarily differences in investment basis, depreciation and amortization, the basis of land assets and the treatment of interests and certain costs	$	(11,812)	$	(7,089)	$	(30,564)
Operating loss and interest deduction carryforwards		94,654		82,469		75,455
Expense accruals and other		25,146		15,978		6,259
Valuation allowance		(127,283)		(96,838)		(98,966)
Net deferred tax assets (liabilities)	$	(19,295)	$	(5,480)	$	(47,816)

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. We apply the concepts on an entity-by-entity, jurisdiction-by-jurisdiction basis. With respect to the analysis of certain entities in multiple jurisdictions, a significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

On the basis of the evaluations performed as required by the codification, valuation allowances totaling $127,283,000 were recorded on U.S. taxable REIT subsidiaries as well as entities in other jurisdictions to limit the deferred tax assets to the amount that we believe is more likely that not realizable. However, the amount of the deferred tax asset considered realizable could be adjusted if (i) estimates of future taxable income during the carryforward period are reduced or increased or (ii) objective negative evidence in the form of cumulative losses is no longer present (and additional weight may be given to subjective evidence such as our projections for growth). The valuation allowance rollforward is summarized as follows for the periods presented (in thousands):


		Year Ended December 31,
		2017		2016		2015
Beginning balance	$	96,838	$	98,966	$	85,207
Expense (benefit)		30,445		(2,128)		13,759
Ending balance	$	127,283	$	96,838	$	98,966

As a result of certain acquisitions, we are subject to corporate level taxes for any related asset dispositions that may occur during the five-year period immediately after such assets were owned by a C corporation (“built-in gains tax”). The amount of income potentially subject to this special corporate level tax is generally equal to the lesser of (a) the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset, or (b) the actual amount of gain. Some but not all gains recognized during this period of time could be offset by available net operating losses and capital loss carryforwards. During the year ended December 31, 2016, we acquired certain additional assets with built-in gains as of the date of acquisition that could be subject to the built-in gains tax if disposed of prior to the expiration of the applicable ten-year period. We have not recorded a deferred tax liability as a result of the potential built-in gains tax based on our intentions with respect to such properties and available tax planning strategies.

Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, the REIT may lease “qualified health care properties” on an arm’s-length basis to a TRS if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the consolidated financial statements and are subject to federal, state and foreign income taxes as the operations of such facilities are included in a TRS. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.

Given the applicable statute of limitations, we generally are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2014 and subsequent years. The statute of limitations may vary in the states in which we own properties or conduct business. We do not expect to be subject to audit by state taxing authorities for any year prior to the year ended December 31, 2011. We are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to May 2012 related to entities acquired or formed in connection with acquisitions, and by the U.K.’s HM Revenue & Customs for periods subsequent to August 2012 related to entities acquired or formed in connection with acquisitions.

At December 31, 2017, we had a net operating loss (“NOL”) carryforward related to the REIT of $448,475,000. Due to our uncertainty regarding the realization of certain deferred tax assets, we have not recorded a deferred tax asset related to NOLs generated by the REIT. These amounts can be used to offset future taxable income (and/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. The NOL carryforwards generated through December 31, 2017 will expire through 2036. Beginning with tax years after December 31, 2017, the Tax Cuts and Jobs Act (“Tax Act”) eliminates the carryback period, limits the NOLs to 80% of taxable income and replaces the 20-year carryforward period with an indefinite carryforward period.

At December 31, 2017 and 2016, we had an NOL carryforward related to Canadian entities of $134,552,000, and $104,988,000, respectively. These Canadian losses have a 20-year carryforward period. At December 31, 2017 and 2016, we had an NOL carryforward related to U.K. entities of $183,712,000 and $158,156,000, respectively. These U.K. losses do not have a finite carryforward period.

We did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017. Our analysis of the Tax Act may be impacted by any corrective legislation and any guidance provided by the U.S. Treasury, the IRS or by the General Explanation of the Tax Act, which is under preparation by the Staff of the Congressional Joint Committee on Taxation. Based on the Tax Act as enacted, we do not believe there will be further material impacts to the consolidated financial statements related to the other Tax Act provisions but cannot assure you as to the outcome of this matter.