Income Tax Considerations

We qualify as a REIT under the provisions of the Internal Revenue Code, and therefore, no tax is imposed on our taxable income distributed to shareholders. To maintain our REIT status, we must distribute at least 90% of our ordinary taxable income to our shareholders and meet certain income source and investment restriction requirements. Our shareholders must report their share of income distributed in the form of dividends.

Taxable income differs from net income for financial reporting purposes principally because of differences in the timing of recognition of depreciation, rental revenue, interest expense, compensation expense, impairment losses and gain from sales of property. As a result of these differences, the book value of our net fixed assets is in excess of (less than) the tax basis by $32.0 million and $(88.0) million at December 31, 2014 and 2013, respectively.

The following table reconciles net income adjusted for noncontrolling interests to REIT taxable income (in thousands):



	Year Ended December 31,
	2014			2013			2012
Net income adjusted for noncontrolling interests	$	288,008		$	220,262		$	146,640
Net (income) loss of taxable REIT subsidiary included above	(4,092		)	(4,684		)	11,457
Net income from REIT operations	283,916			215,578			158,097
Book depreciation and amortization including discontinued operations	150,616			157,665			148,413
Tax depreciation and amortization	(90,328		)	(90,047		)	(92,797		)
Book/tax difference on gains/losses from capital transactions	(87,387		)	(33,969		)	(55,242		)
Deferred/prepaid/above and below-market rents, net	(3,617		)	(6,429		)	(4,264		)
Impairment loss from REIT operations including discontinued operations	942			474			11,396
Other book/tax differences, net	(6,399		)	(9,695		)	1,430
REIT taxable income	247,743			233,577			167,033
Dividends paid deduction⁽¹⁾	(247,743		)	(233,577		)	(173,202		)
Dividends paid in excess of taxable income	$	—		$	—		$	(6,169	)

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(1)	For 2014 and 2013, the dividends paid deduction includes designated dividends of $114.0 million and $67.7 million from 2015 and 2014, respectively.

For federal income tax purposes, the cash dividends distributed to common shareholders are characterized as follows:



	Year Ended December 31,
	2014		2013		2012
Ordinary income	54.0	%	50.5	%	92.8	%
Capital gain distributions	46.0	%	49.5	%	7.2	%
Total	100.0	%	100.0	%	100.0	%

Our deferred tax assets and liabilities, including a valuation allowance, consisted of the following (in thousands):



	December 31,
	2014			2013
Deferred tax assets:
Impairment loss ⁽¹⁾	$	13,900		$	17,692
Allowance on other assets	91			1,168
Interest expense	12,701			12,842
Net operating loss carryforwards ⁽²⁾	11,024			8,814
Book-tax basis differential	1,693			886
Other	412			241
Total deferred tax assets	39,821			41,643
Valuation allowance ⁽³⁾	(27,539		)	(30,541		)
Total deferred tax assets, net of allowance	$	12,282		$	11,102
Deferred tax liabilities:
Straight-line rentals	$	48		$	696
Book-tax basis differential	7,402			8,252
Other	387			167
Total deferred tax liabilities	$	7,837		$	9,115

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(1)	Impairment losses will not be recognized until the related properties are sold and realization is dependent upon generating sufficient taxable income in the year the property is sold.


(2)	We have net operating loss carryforwards of $31.5 million that expire between the years of 2029 and 2034.


(3)	Management believes it is more likely than not that a portion of the deferred tax assets, which primarily consists of impairment losses, interest expense and net operating losses, will not be realized and established a valuation allowance. However, the amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income are reduced.

We are subject to federal, state and local income taxes and have recorded an income tax (benefit) provision as follows (in thousands):



	Year Ended December 31,
	2014			2013		2012
Net income (loss) before taxes of taxable REIT subsidiary	$	1,446		$	10,688	$	(12,894	)
Federal provision (benefit) at statutory rate of 35%	$	506		$	3,741	$	(4,513	)
Valuation allowance (decrease) increase	(3,003		)	2,165		3,781
Other	(149		)	98		(705		)
Federal income tax (benefit) provision of taxable REIT subsidiary ⁽¹⁾	(2,646		)	6,004		(1,437		)
Texas franchise tax ⁽²⁾	1,403			1,370		1,784
Total	$	(1,243	)	$	7,374	$	347

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(1)	All periods presented are open for examination by the IRS.


(2)	For all periods presented, amounts include the effects that are reported in discontinued operations. See Note 15 for additional information.

Also, a current tax obligation of $1.5 million and $1.6 million has been recorded at December 31, 2014 and 2013, respectively, in association with these taxes.