NOTE 13. INCOME TAXES

For the years ended December 2019, 2018, and 2017, the income tax expense related to the operating partnership, including primarily Alternative Minimum Tax (“AMT”) in the years prior to 2018 and certain state and local taxes, totaled $175, $83, and $20, respectively.

The components of the income tax expense (benefit) from the TRS from continuing operations for the years ended December 31, 2019, 2018, and 2017 were as follows:


	Year ended December 31,
	2019		2018		2017
Federal:
Current	$	-	$	-	$	33
Deferred		817		202		(615)
State and local:
Current		2		(8)		12
Deferred		(57)		58		(45)
Income tax expense (benefit)	$	762	$	252	$	(615)

Actual income tax expense of the TRS for the years ended December 31, 2019, 2018, and 2017 differs from the “expected” income tax expense (benefit) (computed by applying the appropriate U.S. federal income tax rate of 21% in 2019 and 2018 and 34% in 2017 to earnings before income taxes) as a result of the following:


	Year ended December 31,
	2019		2018		2017
Computed "expected" income tax (benefit) expense	$	403	$	191	$	546
State income taxes, net of federal income tax (benefit) expense		62		40		47
(Decrease) increase in valuation allowance		(124)		29		(1,097)
Return to provision adjustments		431		(16)		-
Other		(10)		8		(145)
AMT		-		-		34
Total income tax expense (benefit)	$	762	$	252	$	(615)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are as follows:


	As of December 31,
	2019		2018
Deferred Tax Assets
Accrued expenses and other	$	100	$	84
Net operating losses carried forward for federal income tax purposes		374		1,004
Net operating losses carried forward for state income tax purposes		455		615
AMT		58		117
Subtotal deferred tax assets		987		1,820
Valuation allowance		(359)		(483)
Total deferred tax assets		628		1,337

Deferred Liabilities
Tax depreciation in excess of book depreciation		909		714
Atlanta JV basis difference		140		223
Total deferred tax liabilities		1,049		937
Net deferred tax assets (liabilities)	$	(421)	$	400

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 as such no current or deferred federal income tax other than AMT was recognized in the year then ended. At December 31, 2017 and all subsequent periods, 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, 2019 as determined for federal income tax purposes was $1,779. 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 was permanently reduced to 21% and the corporate alternative minimum tax was repealed, and the deduction of net interest expense was 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 interest limitation was determined not to have an impact on the Company’s calculation of taxable income.

The reduced 21% federal income tax rate applicable to corporations applied 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.

As of December 31, 2019, the tax years that remain subject to examination by major tax jurisdictions generally include 2016 through 2019.

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, 2019, 2018, and 2017 were characterized as follows:


	For the year ended December 31,
	2019			2018				2017
	Amount		%	Amount		%	Amount		%
Common Shares:
Ordinary income	$	-	-	$	-	-	$	0.117000	20%
Capital gain		-	-		-	-		-	-
Return of capital		0.585000	100%		0.975000	100%		0.468000	80%
Total	$	0.585000	100%	$	0.975000	100%	$	0.585000	100%

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

Series E Preferred Stock:
Ordinary income	$	-	-	$	-	-	$	0.522569	100%
Capital gain		-	-		-	-		-	-
Return of capital		0.468750	100%		0.625000	100%		-	-
Total	$	0.468750	100%	$	0.625000	100%	$	0.522569	100%

The common and preferred share distributions declared on December 11, 2018 and paid on January 3, 2019 and December 31, 2018, respectively, were treated as 2018 distributions for tax purposes. 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.