INCOME TAXES

For income tax purposes, dividends paid to holders of common stock primarily consist of ordinary income, return of capital, capital gains, qualified dividends and un-recaptured Section 1250 gains, or a combination thereof. For the years ended December 31, 2015, 2014 and 2013, dividends per share held for the entire year were estimated to be taxable as follows:



	2015				2014				2013
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Ordinary income	$	3.07	99.7	%	$	2.76	94.41	%	$	2.36	84.9	%
Capital gains	—		—	%	—		—	%	0.17		6.23	%
Return of capital	—		—	%	0.16		5.59	%	—		—	%
Un-recaptured Section 1250 gain	0.01		0.3	%	—		—	%	0.25		8.87	%
	$	3.08	100.00	%	$	2.92	100.00	%	$	2.78	100.00	%

We designated the per share amounts above as capital gain dividends in accordance with the requirements of the Code. The difference between net income available to common shareholders for financial reporting purposes and taxable income before dividend deductions relates primarily to temporary differences such as depreciation and amortization, and deferral of gains on sold properties utilizing like kind exchanges under Internal Revenue Code, or IRC, section 1031.

Merger and Restructuring

As discussed in Note 2 (Business Combinations), on October 1, 2013, we completed our merger with Colonial and Colonial LP. Pursuant to the merger agreement, OP Merger Sub merged with and into Colonial LP, with Colonial LP being the surviving entity of the merger and becoming a wholly-owned indirect subsidiary of MAALP. We believe that this transaction constitutes a tax free merger under Code section 708. Immediately thereafter, MAA and Colonial combined through a merger of Colonial with and into MAA, with MAA surviving the merger. We believe that this merger constitutes a tax free merger under Code section 368(a). As a result of the tax free merger treatment, the merger transactions did not result in the recognition of a gain to any security holder of MAA, Colonial, MAALP, or Colonial LP.

On October 1, 2013, MAA re-identified hedging transactions for federal income tax purposes according to Reg. §1.1221-2(f) and all relevant state income tax purposes that were previously held by Colonial. This re-identification was made because the tax identity of Colonial changed by virtue of the merger into MAA. There were four hedging transactions re-identified for tax purposes, including the $50 million interest rate swap with Wells Fargo Bank, N.A. ("Wells Fargo") with a fixed interest rate of 2.465%, the $200 million interest rate swap with Wells Fargo with a fixed interest rate of 2.576%, the $50 million interest rate swap with Wells Fargo with a fixed interest rate of 1.064%, and the $100 million interest rate swap with Wells Fargo with a fixed interest rate of 1.133%.

Taxable REIT subsidiaries

We acquired the operations of a TRS, Colonial Properties Services, Inc., or CPSI, through the Merger. As a result, CPSI’s tax attributes are now included in the MAA consolidated financial statements. A TRS is an entity which is not entitled to a dividends paid deduction and is subject to Federal, state, and local income taxes. Formerly, CPSI provided property development, construction, leasing and management services for joint venture and third-party owned properties and administrative services to MAA and engaged in for-sale development activity. CPSI also owns and operates two multifamily apartment communities. We generally reimburse CPSI for payroll and other costs incurred in providing services to us. All inter-company transactions are eliminated in the accompanying consolidated financial statements. We also hold certain undeveloped land through another TRS, MAA Copper Ridge, Inc. During the years ended December 31, 2015, 2014, and 2013, our TRSs recognized no income tax expense/(benefit).

CPSI uses the liability method of accounting for income taxes. Deferred income tax assets and liabilities result from temporary differences. Temporary differences are differences between tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future periods. The net deferred tax assets of the Company, consisting of the net deferred tax assets of CPSI and the net-loss deferred tax asset acquired by MAA from Colonial, have been fully offset by a valuation allowance. We record a valuation allowance against our net deferred tax assets when we determine that based on the weight of available evidence, it is more likely than not that our net deferred tax assets will not be realized. We considered the four sources of taxable income that should be considered when determining whether a valuation allowance is required (from least to most subjective):


•	taxable income in prior carryback years, if carryback is permitted under the tax law;


•	future reversals of existing taxable temporary differences (i.e., offset gross deferred tax assets against gross deferred tax liabilities);


•	tax planning strategies; and


•	future taxable income exclusive of reversing temporary differences and carryforwards.

For the years ended December 31, 2015 and 2014, the components of CPSI’s deferred income tax assets and liabilities were as follows (dollars in thousands):



	December 31, 2015			December 31, 2014
Deferred tax assets:
Real estate asset basis differences	$	25,627		$	25,561
Deferred revenue	22			18
Deferred expenses	14,106			13,923
Net operating loss carryforward	28,493			27,215
Accrued liabilities	3,951			3,974
	$	72,199		$	70,691
Deferred tax liabilities:
Real estate asset basis differences	$	(145	)	$	(913	)
	$	(145	)	$	(913	)
Net deferred tax assets, before valuation allowance	$	72,054		$	69,778
Valuation allowance	(72,054		)	(69,778		)
Net deferred tax assets, included in other assets	$	—		$	—

For the years ended December 31, 2015, 2014 and 2013, the reconciliation of income tax attributable to continuing operations for the TRSs computed at the U.S. statutory rate to the income tax provision was as follows (dollars in thousands):



	December 31, 2015			December 31, 2014			December 31, 2013
Tax expense/(benefit) at U.S. statutory rates on TRS income subject to tax	$	2,506		$	1,802		$	(261	)
Effect of permanent differences and other	(730		)	(1,110		)	1
(Decrease) increase in valuation allowance	(1,776		)	(692		)	260
TRS income tax provision	$	—		$	—		$	—

At December 31, 2015 and 2014, CPSI had net operating loss, or NOL carryforwards of approximately $66.0 million and $63.1 million, respectively, for income tax purposes that expire in years 2031 to 2034. Utilization of the Company’s NOL carryforwards is subject to an annual limitation due to ownership change limitations provided by Section 382 of the Code and similar state provisions. The annual limitations may result in the expiration of NOL carryforwards before utilization. CPSI generated approximately $0.3 million of taxable income before NOL carryforwards for the period ended December 31, 2015.

We had no reserve for uncertain tax positions for the years ended December 31, 2015, 2014 and 2013. If necessary, the Company accrues interest and penalties on unrecognized tax benefits as a component of income tax expense.

For the years ended December 31, 2015, 2014, and 2013, other expenses include estimated state franchise and other taxes, including franchise taxes in North Carolina and Tennessee. The income tax expense line item shown in the Consolidated Statement of Operations represents the Texas-based margin tax for all Texas properties.

As of December 31, 2015, MAA held NOL carryforwards of approximately $46.3 million for income tax purposes that expire in years 2019 to 2031. We may use these NOLs to offset all or a portion of the taxable income generated at the REIT level.

Tax years 2012 through 2015 are subject to examination by the Internal Revenue Service. No tax examination is currently in process.