Income Taxes

We have elected to be taxed as a "REIT" pursuant to Section 856(c) of the Internal Revenue Code of 1986 (“Code”), as amended. In order for us to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute annually at least 90% of its REIT taxable income (calculated without any deduction for dividends paid and excluding capital gain) to its stockholders and meet other tests.

Qualification as a REIT involves the satisfaction of numerous requirements (on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. In addition, frequent changes occur in the area of REIT taxation, which requires us to continually monitor our tax status. We analyzed the various REIT tests and confirmed that we continued to qualify as a REIT for the year ended December 31, 2016.

As a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on the ordinary taxable income we distribute to our stockholders as dividends. If we fail to qualify as a REIT in any taxable year, our taxable income could be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes as well as U.S. federal income and excise taxes on our undistributed income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes. The Company is also subject to local income taxes in Canada as a result of the acquisition of Carefree in 2016. We do not provide for withholding taxes on our undistributed earnings from our Canadian subsidiaries as they are reinvested and will continue to be reinvested indefinitely outside the United States.

For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains, and return of capital. For the years ended December 31, 2016, 2015, and 2014, distributions paid per share were taxable as follows (unaudited/rounded):



	Years Ended December 31,
	2016				2015				2014
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Ordinary income	$	0.81	31.2	%	$	1.08	41.7	%	$	0.82	31.7	%
Capital gain	0.51		19.6	%	0.78		30.1	%	0.64		24.6	%
Return of capital	1.28		49.2	%	0.74		28.2	%	1.14		43.7	%
Total distributions declared	$	2.60	100.0	%	$	2.60	100.0	%	$	2.60	100.0	%

Our taxable REIT subsidiaries are subject to U.S. federal income taxes as well as state and local income and franchise taxes. In addition, our Canadian subsidiaries are subject to income tax in Canada.

The components of our provision for income taxes attributable to continuing operations for the year ended December 31, 2016 are as follows (amounts in thousands):



	Year Ended December 31, 2016
Federal
Current	$	187
State and Local
Current	438
Foreign
Current	58
Deferred	(400		)
	(342		)

Total Provision	$	283

The above provision summary is presented only for the year 2016 due to the acquisition of Carefree which is taxable in Canada.

A reconciliation of the provision for income taxes with the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the year ended December 31, 2016 is as follows (amounts in thousands):



	Year Ended December 31, 2016
Pre-tax income (loss) attributable to taxable subsidiaries	$	(11,157	)

Federal provision (benefit) at statutory tax rate (34%)	(3,794		)	34.0	%
State and local taxes, net of federal benefit	(183		)	1.6	%
Alternative minimum tax	93			(0.8	)%
Rate differential	104			(0.9	)%
Change in valuation allowance	4,021			(36.0	)%
Others	(225		)	2.0	%
Tax provision - taxable subsidiaries	16			(0.1	)%
Other state taxes - flow through subsidiaries	267
Total provision	$	283

The above reconciliation summary is presented only for the year 2016 due to the acquisition of Carefree which is taxable in Canada.

Our deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a valuation allowance to the amount where realization is more likely than not assured after considering all available evidence. Our temporary differences primarily relate to net operating loss carryforwards, depreciation and basis differences between tax and U.S. GAAP on our Canadian investments.

The deferred tax assets and liabilities included in the consolidated balance sheets are comprised of the following tax effects of temporary differences (amounts in thousands):



	As of December 31,
	2016			2015
Deferred Tax Assets
Net operating loss carryforwards	$	30,821		$	31,096
Real estate assets	33,167			27,315
Other	1,746			1,430
Gross deferred tax assets	65,734			59,841
Valuation allowance	(63,862		)	(59,841		)
Net deferred tax assets	1,872			—

Deferred Tax Liabilities
Basis differences - foreign investment	(23,816		)	—
Gross deferred tax liabilities	(23,816		)	—

Net Deferred Tax Liability ⁽¹⁾	$	(21,944	)	$	—

⁽¹⁾ Net deferred tax liability is included within Other liabilities in our Consolidated Balance Sheets.

SHS has U.S. operating loss carryforwards of approximately $85.1 million , or $28.9 million after tax, as of December 31, 2016. The loss carryforwards will begin to expire in 2021 through 2035 if not offset by future taxable income. In addition, our Canadian subsidiaries have operating loss carryforwards of approximately $8.7 million, or $2.3 million after tax, as of December 31, 2016. The loss carryforwards will begin to expire in 2031 through 2036 if not offset by future taxable income.

We had no unrecognized tax benefits as of December 31, 2016 and 2015. We expect no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2016.

We classify certain state taxes as income taxes for financial reporting purposes. We recorded a provision for state income taxes of approximately $0.4 million for the year ended December 31, 2016 and $0.2 million for each of the years ended December 31, 2015 and 2014.

As previously noted, we and our subsidiaries are subject to income taxes in the U.S. and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and local, examinations by tax authorities for the tax years ended December 31, 2010 and prior. In addition, our Canadian subsidiaries are subject to taxes in Canada and in the province of Ontario. We are no longer subject to examination by the Canadian tax authorities for the tax years ended December 31, 2011 and prior.

Our policy is to report income tax penalties and income tax related interest expense as a component of income tax expense. No interest or penalty associated with any unrecognized income tax benefit or provision was accrued, nor was any income tax related interest or penalty recognized during the years ended December 31, 2016, 2015 and 2014.