NOTE 13. INCOME TAXES

For the years ended December 2020, 2019, and 2018, the income tax expense related to the operating partnership included primarily certain state and local taxes totaling $105, $175, and $83, respectively.

The components of the income tax expense (benefit) from the TRS for the years ended December 31, 2020, 2019, and 2018 were as follows:


	Year ended December 31,
	2020		2019		2018
Federal:
Current	$	-	$	-	$	-
Deferred		(550)		817		202
State and local:
Current		-		2		(8)
Deferred		70		(57)		58
Income tax expense (benefit)	$	(480)	$	762	$	252

Actual income tax expense of the TRS for the years ended December 31, 2020, 2019, and 2018 differs from the “expected” income tax expense (benefit) (computed by applying the appropriate U.S. federal income tax rate of 21% to earnings before income taxes) as a result of the following:


	Year ended December 31,
	2020		2019		2018
Computed "expected" income tax (benefit) expense	$	(1,893)	$	403	$	191
State income taxes, net of federal income tax (benefit) expense		(240)		62		40
(Decrease) increase in valuation allowance		1,383		(124)		29
Return to provision adjustments		-		431		(16)
Adjustment to state net operating losses		248		-		-
Other		22		(10)		8
Total income tax expense (benefit)	$	(480)	$	762	$	252

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are as follows:


	As of December 31,
	2020		2019
Deferred Tax Assets
Accrued expenses and other	$	101	$	100
Net operating losses carried forward for federal income tax purposes		1,951		374
Net operating losses carried forward for state income tax purposes		424		455
AMT		-		58
Subtotal deferred tax assets		2,476		987
Valuation allowance		(1,742)		(359)
Total deferred tax assets		734		628

Deferred Liabilities
Tax depreciation in excess of book depreciation		734		909
Atlanta JV basis difference		-		140
Total deferred tax liabilities		734		1,049
Net deferred tax assets (liabilities)	$	-	$	(421)

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. Prior to 2020, it was determined by management that a valuation allowance against deferred tax assets was not required, with the exception of an allowance against certain state net operating losses, as management believed that it is more likely than not that remaining deferred tax assets will be realized. In 2020, as a result of the impact of the COVID-19 pandemic on the Company’s performance, the Company believes that a full valuation allowance against the net deferred tax asset position was necessary at December 31, 2020, which requires a valuation allowance of $1,742 as of that date.

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, 2020 as determined for federal income tax purposes was $1,951. The availability of the loss carryforwards will expire in 2027 through 2034, with an indefinite carryforward for losses arising after December 31, 2017.

As of December 31, 2020, the tax years that remain subject to examination by major tax jurisdictions generally include 2017 through 2020.

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.

No distributions were paid in 2020. For income tax purposes, distributions paid per share for the years ended December 31, 2019 and 2018 were characterized as follows:


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

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