NOTE 13. INCOME TAXES

For the years ended December 2017, 2016, and 2015, the income tax expense related to the operating partnership, including primarily Alternative Minimum Tax (“AMT”) and certain state and local taxes, totaled $20, $35, and $0, respectively.

The components of the income tax expense (benefit) from the TRS from continuing operations for the years ended December 31, 2017, 2016, and 2015 were as follows:


	Year ended December 31,
	2017		2016		2015
Federal:
Current	$	33	$	90	$	-
Deferred		(615)		-		-
State and local:
Current		12		-		-
Deferred		(45)		-		-
Income tax expense (benefit)	$	(615)	$	90	$	-

Actual income tax expense of the TRS for the years ended December 31, 2017, 2016, and 2015 differs from the “expected” income tax expense (benefit) (computed by applying the appropriate U.S. federal income tax rate of 34% to earnings before income taxes) as a result of the following:


	Year ended December 31,
	2017		2016		2015
Computed "expected" income tax (benefit) expense	$	546	$	993	$	684
State income taxes, net of federal income tax (benefit) expense		47		139		82
(Decrease) increase in valuation allowance		(1,097)		(1,082)		(722)
Other		(145)		(50)		(44)
AMT		34		90		-
Total income tax expense (benefit)	$	(615)	$	90	$	-

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows:


	As of December 31,
	2017		2016
Deferred Tax Assets
Accrued expenses and other	$	104	$	99
Net operating losses carried forward for federal income tax purposes		814		1,295
Net operating losses carried forward for state income tax purposes		579		182
AMT		123		-
Book depreciation in excess of tax depreciation		-		38
Subtotal deferred tax assets		1,620		1,614
Valuation allowance		(454)		(1,551)
Total deferred tax assets		1,166		63

Deferred Liabilities
Tax depreciation in excess of book depreciation		363		-
Atlanta JV basis difference		143		63
Total deferred tax liabilities		506		63
Net deferred tax assets	$	660	$	-

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers projected reversals of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result of this analysis, the Company believed that a full valuation allowance against the net deferred tax asset position was necessary at December 31, 2016 and 2015 and as such no current or deferred federal income tax was recognized in the years then ended. At December 31, 2017, it was determined by management that a valuation allowance against deferred tax assets was no longer required, with the exception of an allowance against certain state net operating losses, as management believes that it is more likely than not that remaining deferred tax assets will be realized.

After consideration of limitations related to a change in control as defined under Internal Revenue Code Section 382 following the Company’s common and preferred equity transactions, the TRS’s net operating loss carryforward at December 31, 2017 as determined for federal income tax purposes was $3,876. The availability of the loss carryforwards will expire in 2027 through 2034.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (“TCJA”), was enacted. The TCJA made many significant changes to the U.S. federal income tax laws as of January 1, 2018. Pursuant to this legislation, the federal income tax rate applicable to corporations is permanently reduced to 21% and the corporate alternative minimum tax is repealed, and the deduction of net interest expense is limited for all businesses, provided that certain businesses, including real estate businesses, may elect not to be subject to such limitations and instead to depreciate their real property related assets over longer depreciable lives.

The reduced 21% federal income tax rate applicable to corporations will apply to taxable earnings reported for the full 2018 fiscal year. Accordingly, the Company has remeasured its net deferred tax assets using the lower federal tax rate that will apply when these amounts are expected to reverse. As a result, in the fourth quarter of 2017, we recognized tax expense of $304 resulting from the revaluation of U.S. net deferred tax assets.

The SEC has issued Staff Accounting Bulletin No. 118 which permits the recording of provision amounts related to the impact of the TCJA during a measurement period which is not to exceed one year from the enactment date of the law. The Company has included estimates related to the TCJA in these consolidated financial statements and will revalue those impacts as we continue to gather and analyze information.

As of December 31, 2017, the tax years that remain subject to examination by major tax jurisdictions generally include 2014 through 2017.

Distributions to the extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a shareholder as ordinary income. Distributions in excess of current and accumulated earnings and profits generally will be treated as a nontaxable reduction of the shareholder’s basis in such shareholder’s shares, to the extent thereof, and thereafter as taxable capital gain. Distributions that are treated as a reduction of the shareholder’s basis in its shares will have the effect of increasing the amount of gain, or reducing the amount of loss, recognized upon the sale of the shareholder’s shares.

For income tax purposes, distributions paid per share for the years ended December 31, 2017 and 2016 were characterized as follows:


	For the year ended December 31,
	2017				2016
	Amount		%	Amount		%
Common Shares:
Ordinary income	$	0.156000	20%	$	0.455000	100%
Capital gain		-	-		-	-
Return of capital		0.624000	80%		-	-
Total	$	0.780000	100%	$	0.455000	100%

Series C Preferred Stock:
Ordinary income	$	-	-	$	1.649124	100%
Capital gain		-	-		-	-
Return of capital		-	-		-	-
Total	$	-	-	$	1.649124	100%

Series D Preferred Stock:
Ordinary income	$	0.104160	100%	$	0.494792	100%
Capital gain		-	-		-	-
Return of capital		-	-		-	-
Total	$	0.104160	100%	$	0.494792	100%

Series E Preferred Stock:
Ordinary income	$	0.522569	100%	$	-	-
Capital gain		-	-		-	-
Return of capital		-	-		-	-
Total	$	0.522569	100%	$	-	-

The common share distribution declared on December 19, 2017 and paid on January 10, 2018 was treated as a 2018 distribution for tax purposes. The preferred share distribution declared on December 19, 2017 and paid on January 2, 2018 was treated as a 2017 distribution for tax purposes. The common and preferred share distributions declared on December 6, 2016 and paid on January 5, 2017 and January 3, 2017, respectively, were treated as 2016 distributions for tax purposes.

A portion of the redemption price of the Series A and B Preferred Stock that was redeemed for cash on April 15, 2016 included amounts equal to the accrued and unpaid dividends on such stock. However, the entire redemption price, inclusive of amounts equal to accrued and unpaid dividends, was treated as payment in exchange for the redeemed stock and none of the redemption price is treated as a distribution of dividends under the Code for federal income tax purposes.

No dividends on common stock or preferred stock were declared or paid in 2015.