Income Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities of the TRS entities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows (in thousands):



	December 31,
	2014			2013
Deferred tax liabilities:
Real estate and real estate partnership basis differences	$	38,231		$	26,110
Deferred revenue	—			25,596
Total deferred tax liabilities	$	38,231		$	51,706

Deferred tax assets:
Net operating, capital and other loss carryforwards	$	6,699		$	62,651
Receivables	45			440
Accruals and expenses	5,430			9,272
Tax credit carryforwards	29,714			12,905
Management contracts and other	222			344
Total deferred tax assets	42,110			85,612
Valuation allowance	(3,627		)	(3,553		)
Net deferred income tax assets	$	252		$	30,353

During the year ended December 31, 2014, our TRS entities sold the interests held in our tax credit business to the Aimco Operating Partnership. Through the date of sale the income resulting from these interests was subject to income taxes. The Federal tax liabilities resulting from the sale were substantially offset through the utilization of net operating loss carry forwards and historic and other tax credits. In accordance with GAAP applicable to income tax accounting for intercompany transactions, net tax expense associated with the sale, totaling $6.5 million, has been deferred within our consolidated balance sheet, and will be recognized in earnings as the assets of the tax credit business affect our GAAP income or loss, through depreciation, impairment losses, or sales to third party entities. Subsequent to the sale of the tax credit business, the income resulting from interests held in the tax credit business will not result in Federal income tax liability to the Aimco Operating Partnership.

During the year ended December 31, 2014, we increased the valuation allowance on a net basis by approximately $0.1 million with a minor effect on the effective tax rate.

A reconciliation of the beginning and ending balance of our unrecognized tax benefits is presented below (in thousands):



	2014			2013			2012
Balance at January 1	$	2,871		$	3,536		$	3,917
Reductions as a result of a lapse of the applicable statutes	—			(764		)	(684		)
(Reductions) additions based on tax positions related to prior years and current year excess benefits related to stock-based compensation	(585		)	99			303
Balance at December 31	$	2,286		$	2,871		$	3,536

Because the statute of limitations has not yet elapsed, our United States Federal income tax returns for the year ended December 31, 2011, and subsequent years and certain of our State income tax returns for the year ended December 31, 2010, and subsequent years are currently subject to examination by the IRS or other taxing authorities. Approximately $2.2 million of unrecognized benefit, if recognized, would affect the effective rate.

On October 25, 2012, the Internal Revenue Service, or IRS, issued Final Partnership Administrative Adjustments with respect to the Aimco Operating Partnership’s 2006 and 2007 tax years. On January 18, 2013, AIMCO-GP, Inc., in its capacity as tax matters partner of the Aimco Operating Partnership, filed a petition challenging those adjustments in the United States Tax Court in Washington, D.C. On December 20, 2013, the parties agreed on the terms of a settlement of that litigation. On July 23, 2014, the United States Tax Court approved the stipulated decision document previously filed by the IRS and the Aimco Operating Partnership. The settlement had no material effect on our unrecognized tax benefits, financial condition or results of operations.

On March 19, 2014, the IRS notified the Aimco Operating Partnership of its intent to audit the 2011 and 2012 tax years. We do not believe the audit will have any material effect on our unrecognized tax benefits, financial condition or results of operations.

Our policy is to include any interest and penalties related to income taxes within the income tax line item in our consolidated statements of operations.

In accordance with the accounting requirements for stock-based compensation, we may recognize tax benefits in connection with the exercise of stock options by employees of our TRS entities and the vesting of restricted stock awards. During each of the years ended December 31, 2014 and 2013, we had cumulatively $0.8 million and $0.6 million, respectively, in excess tax benefits from employee stock option exercises and vested restricted stock awards. During 2014, all of the excess tax benefits were realized and included in additional paid-in capital.

Significant components of the income tax benefit or expense are as follows and are classified within income tax benefit in continuing operations and income from discontinued operations, net in our statements of operations for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	2014			2013			2012
Current:
Federal	$	—		$	—		$	—
State	970			63			1,047
Total current	970			63			1,047

Deferred:
Federal	11,556			7,621			7,116
State	3,485			1,685			812
Total deferred	15,041			9,306			7,928
Total expense (benefit)	$	16,011		$	9,369		$	8,975
Classification:
Continuing operations	$	(20,047	)	$	(1,959	)	$	(858	)
Discontinued operations	$	—		$	11,328		$	9,833
Gain on dispositions of real estate	$	36,058		$	—		$	—

As discussed in Note 2, during the year ended December 31, 2014, we early adopted ASU 2014-08, which revised the definition of, and the requirements for reporting, a “discontinued operation.” Based on our prospective application of the revised discontinued operation definition, the results of operations and related income taxes for apartment communities sold or classified as held for sale during the year ended December 31, 2014, are reflected within income from continuing operations in our consolidated statements of operations. The gain on disposition and related income taxes for apartment communities sold during the year ended December 31, 2014, are reflected below income from discontinued operations within our consolidated statements of operations.

Consolidated income or loss subject to tax consists of pretax income or loss of our TRS entities and gains or losses on certain apartment community sales that are subject to income tax under section 1374 of the Internal Revenue Code. For the years ended December 31, 2014, 2013 and 2012, we had consolidated income subject to tax of $137.0 million, $46.6 million and $19.0 million, respectively. The reconciliation of income tax attributable to continuing and discontinued operations computed at the United States statutory rate to income tax expense (benefit) is shown below (dollars in thousands):



	2014					2013					2012
	Amount			Percent		Amount			Percent		Amount			Percent
Tax at United States statutory rates on consolidated income or loss subject to tax	$	47,950		35.0	%	$	16,326		35.0	%	$	6,642		35.0	%
State income tax expense (benefit), net of Federal tax (benefit) expense	4,364			3.2	%	1,748			3.7	%	1,859			9.8	%
Effect of permanent differences	(154		)	(0.1	)%	(296		)	(0.6	)%	(256		)	(1.3	)%
Tax effect of intercompany transfers of assets between the REIT and taxable REIT subsidiaries (1)	(23,969		)	(17.5	)%	(4,272		)	(9.2	)%	730			3.8	%
Tax credits	(12,271		)	(9.0	)%	(4,137		)	(8.9	)%	—			—	%
Increase in valuation allowance	91			0.1	%	—			—	%	—			—	%
	$	16,011		11.7	%	$	9,369		20.0	%	$	8,975		47.3	%


(1)	Includes the effect of intercompany asset transfers between the Aimco Operating Partnership and TRS entities, for which tax is deferred and recognized as the assets affect GAAP income or loss, for example, through depreciation, impairment, or upon the sale of the asset to a third party.

Income taxes paid totaled approximately $1.7 million, $0.6 million and $1.1 million, respectively, in the years ended December 31, 2014, 2013 and 2012, respectively.

At December 31, 2014, we had no remaining Federal net operating loss carryforwards, or NOLs, and we had certain state NOLs for which the deferred tax asset was approximately $6.7 million before valuation allowance of $3.6 million. The NOLs expire in years 2027 to 2033. Subject to certain separate return limitations, we may use these NOLs to offset a portion of state taxable income generated by our TRS entities. We utilized approximately $154.4 million of Federal NOLs during the year ended December 31, 2014, as a result of taxable gains recognized by our TRS entities.

As of December 31, 2014, we had low-income housing and historic tax credit carryforwards of approximately $30.2 million for income tax purposes that expire for the tax years 2017 to 2032. The deferred tax asset related to these credits is approximately $29.7 million.

For income tax purposes, dividends paid to holders of Common Stock primarily consist of ordinary income, capital gains, qualified dividends and unrecaptured Section 1250 gains, or a combination thereof. For the years ended December 31, 2014, 2013 and 2012, dividends per share held for the entire year were estimated to be taxable as follows:



	2014				2013				2012
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Ordinary income	$	0.01	0.6	%	$	0.17	17.9	%	$	—	—	%
Capital gains	0.53		51.6	%	0.13		13.9	%	0.35		46.6	%
Unrecaptured Section 1250 gain	0.50		47.8	%	0.66		68.2	%	0.41		53.4	%
	$	1.04	100.0	%	$	0.96	100.0	%	$	0.76	100.0	%

We designated the per share amounts above as capital gain dividends in accordance with the requirements under the Code. Additionally, we designated as 2014 capital gain dividends a like portion of preferred dividends.