Note 8. Income Taxes

The RMA was included in the Tax Relief Extension Act of 1999, which was enacted into law on December 17, 1999. The RMA includes numerous amendments to the provisions governing the qualification and taxation of REITs, and these amendments were effective January 1, 2001. One of the principal provisions included in the Act provides for the creation of TRS. TRS's are corporations that are permitted to engage in nonqualifying REIT activities. A REIT is permitted to own up to 100% of the voting stock in a TRS. Previously, a REIT could not own more than 10% of the voting stock of a corporation conducting nonqualifying activities. Relying on this legislation, in November 2001, the Company formed the TRS Lessee.

As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income it distributes currently to stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income of a TRS is subject to federal, state and local income taxes.

In connection with the Company's election to be taxed as a REIT, it has also elected to be subject to the "built-in gain" rules on the assets formerly held by the old Supertel. Under these rules, taxes will be payable at the time and to the extent that the net unrealized gains on assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten-year period following conversion. The ten-year period ended November 1, 2011.

At December 31, 2011, the income tax bases of the Company's assets and liabilities excluding those of TRS were approximately $237,775 and $150,572, respectively; at December 31, 2010, they were approximately $263,706 and $166,997, respectively.

The TRS net operating loss carryforward from December 31, 2011 as determined for federal income tax purposes was approximately $14.6 million. The availability of such loss carryforward will begin to expire in 2022.

Income tax benefit from continuing operations for the years ended December 31, 2011, 2010 and 2009 consists of the following:


	2011									2010									2009
	Federal			State			Total			Federal			State			Total			Federal			State			Total
Deferred tax benefit		(536	)		(102	)		(638	)		(396	)		(76	)		(472	)		(242	)		(53	)		(295	)


Total income tax benefit	$	(536	)	$	(102	)	$	(638	)	$	(396	)	$	(76	)	$	(472	)	$	(242	)	$	(53	)	$	(295	)

The actual income tax benefit from continuing operations of the TRS for the years ended December 31, 2011, 2010 and 2009 differs from the "expected" income tax 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:


	2011			2010			2009
Computed "expected" income tax benefit	$	(571	)	$	(465	)	$	(254	)
State income taxes, net Federal income tax benefit		(67	)		(55	)		(35	)
Other		—			48			(6	)

Total income tax benefit	$	(638	)	$	(472	)	$	(295	)

The continuing and discontinued combined tax effects of temporary differences that give rise to significant portions of the deferred tax assets and the deferred tax liability at December 31, 2011, 2010 and 2009 are as follows:


	2011		2010		2009
Deferred Tax Assets:
Expenses accrued for consolidated financial statement purposes, nondeductible for tax return purposes	$	326	$	297	$	281

Net operating losses carried forward for federal income tax purposes		5,524		3,827		2,511


Total deferred tax assets		5,850		4,124		2,792


Deferred Liabilities:
Tax depreciation in excess of book depreciation		240		418		843


Total deferred tax liabilities		240		418		843


Net deferred tax assets	$	5,610	$	3,706	$	1,949

The TRS has estimated its income tax benefit using a combined federal and state rate of approximately 38%. As of the year ended 2011, 2010 and 2009 the TRS had deferred tax assets of $5.9 million, $4.1 million and $2.8 million, respectively, primarily due to current and past years' tax net operating losses. These loss carryforwards will begin to expire in 2022 through 2031. 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 ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers projected scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. These estimates of future taxable income inherently require significant judgment. Management uses historical experience and short and long-range business forecasts to develop such estimates. Further, we employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the extent management does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations. Based on consideration of these items, management has determined that no valuation allowance is required.

Income taxes are accounted for under the asset and liability method. The Company uses an estimate of its annual effective rate based on the facts and circumstances at the time while the actual effective rate is calculated at year end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. There is no valuation allowance at December 31, 2011, 2010 or 2009. As of December 31, 2011, the tax years that remain subject to examination by major tax jurisdictions generally include 2007 through 2011.

Dividends Paid

There were no dividends paid during the years ended December 31, 2011 and 2010. Dividends paid were $0.08 per share during the year ended December 31, 2009; of which $0.053 represented capital gain distribution and $0.027 represented a nondividend distribution to shareholders.