Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

9. Income Taxes

The Company has elected for two of its existing subsidiaries to be taxed as taxable REIT subsidiaries pursuant to the REIT rules of the U.S. Internal Revenue Code. Pursuant to the transaction described in Note 3 – Acquisitions, we also have subsidiaries subject to tax in non-US jurisdictions.

For the taxable REIT subsidiaries, income taxes are accounted for under the asset and liability method in accordance with ASC Topic 740. 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 bases and operating loss and tax credit carryforwards. 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. We consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. It is possible that some or all of our deferred tax assets could ultimately expire unused. The Company establishes valuation allowances against deferred tax assets when the ability to fully utilize these benefits is determined to be uncertain.

The components of income tax provision from continuing operations are:

	For the Year Ended December 31,
	2019		2018		2017
Current:
U.S. federal	$	—	$	(50)	$	42
U.S. State		298		395		297
Outside United States		13		78		44
Total Current		311		423		383
Deferred:
U.S. federal		(276)		(3,727)		(9,734)
U.S. State		(71)		(64)		(427)
Outside United States		(1)		—		—
Total Deferred		(348)		(3,791)		(10,161)
Total	$	(37)	$	(3,368)	$	(9,778)

Temporary differences and carry forwards which give rise to the deferred tax assets and liabilities are as follows:

	For the Year Ended December 31,
	2019		2018		2017
Deferred tax assets
Net operating loss carryforwards	$	20,218	$	17,610	$	8,888
Deferred revenue and setup charges		1,299		3,171		3,435
Operating lease liabilities		2,266		—		—
Property and equipment		512		—		—
Leases		—		1		453
Credits		300		287		543
Bad debt reserve		18		409		2,250
Intangibles		804		—		—
Interest expense carryforward IRC Sec. 163(j)		2,782		2,253		—
Other		1,376		1,534		1,607
Gross deferred tax assets		29,575		25,265		17,176
Deferred tax liabilities
Property and equipment		—		(3,089)		(4,940)
Goodwill		(2,494)		(1,953)		(1,396)
Intangibles		(591)		(11,910)		(13,606)
Operating lease right-of-use assets		(1,261)		—		—
Other		(1,231)		(1,049)		(1,132)
Gross deferred tax liabilities		(5,577)		(18,001)		(21,074)
Net deferred tax asset/(liability)		23,998		7,264		(3,898)
Valuation allowance		(24,747)		(8,361)		(713)
Net deferred tax liability	$	(749)	$	(1,097)	$	(4,611)

The taxable REIT subsidiaries currently have net operating loss carryforwards related to federal income taxes of $33.4 million that expire in 10-17 years and $39.9 million which have no expiration. The taxable REIT subsidiaries also have $78.4 million of net operating loss carryforwards relating to state income taxes that expire in 1-20 years. The Company’s interest expense carryforward of $10.9 million has no expiration.

The effective tax rate is subject to change in the future due to various factors such as the operating performance of the taxable REIT subsidiaries, tax law changes and future business acquisitions. The differences between total income tax expense or benefit and the amount computed by applying the statutory income tax rate to income before provision for income taxes with respect to the TRS activity were as follows:

	For the Year Ended December 31,
	2019		2018		2017
TRS
Statutory rate applied to pre-tax loss	$	(12,991)	$	(9,656)	$	(5,109)
Permanent differences, net		16		97		(284)
State income tax, net of federal benefit		(2,868)		(1,430)		(388)
Foreign income tax		13		78		44
Federal and State rate change		(20)		(146)		(3,251)
Contribution of Assets to TRS		—		—		(866)
Other		(110)		41		(244)
Valuation allowance increase (decrease)		15,923		7,648		320
Total tax benefit	$	(37)	$	(3,368)	$	(9,778)
Effective tax rate		0.1%		7.3%		65.1%

On December 22, 2017, the Tax Cuts and Jobs Act ("The Act"), was signed into law by President Trump. The tax legislation contains several provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.

The Company had significant deferred tax liabilities, primarily related to fixed assets and intangibles, on its balance sheets as of December 31, 2017. The value of the net deferred tax liabilities decreased significantly as a result of the reduction in the U.S. corporate income tax rate. Consequently, operating results for the reporting period ended December 31, 2017 reflected a one-time non-cash income tax benefit of $3.3 million for the re-measurement of deferred tax assets (liabilities).

The Act also repealed corporate alternative minimum tax (“AMT”) for tax years beginning January 1, 2018, and provides that existing AMT credit carryforwards are refundable beginning in 2018. The Company has approximately $0.3 million of AMT credit carryovers that are expected to be fully refunded by 2022. The repeal of AMT did not result in any one-time income tax expense (benefit) to operating results.

The Company followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provided additional clarification regarding the application of ASC Topic 740 in situations where the Company may not have had the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period ended December 31, 2017 in which the Act was enacted. SAB 118 provided for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements. In no circumstances was the measurement period to extend beyond one year from the enactment date.

The Company completed its accounting for income tax effects of the Act in the reporting period ended December 31, 2018 and included the impacts in its income tax provision from continuing operations in accordance with the measurement period guidance provided in SAB 118. The impacts of completing its accounting were not material to the income tax provision of the Company’s effective tax rate.

As of December 31, 2019, 2018 and 2017, the Company had no uncertain tax positions. If the Company accrues any interest or penalties on tax liabilities from significant uncertain tax positions, those items will be classified as interest expense and general and administrative expense, respectively, in the Statements of Operations and Statements of

Comprehensive Income. For the years ended December 31, 2019, 2018, and 2017, the Company had accrued no such interest or penalties.

The Company is currently not under examination by the Internal Revenue Service or any state or foreign jurisdictions. Tax years ending after December 31, 2015 remain subject to examination and assessment, state limitation periods included. Tax years ending December 31, 2009 through December 31, 2015 remain open solely for purposes of examination of our loss and credit carryforwards.

The Company provides a valuation allowance against deferred tax assets if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The evidence contemplated by management at December 31, 2019, 2018, and 2017 consists of current and prior operating results, available tax planning strategies, and the scheduled reversal of existing taxable temporary differences. Evidence from the scheduled reversal of taxable temporary differences relies on management judgements based on the accumulation of available evidence. Those judgements may be subject to change in the future as evidence available to management changes. Management’s assessment of the Company’s valuation allowance may further change based on our generation or ability to project of future operating income, and changes in tax policy or tax planning strategies.

As of December 31, 2019, 2018, and 2017 valuation allowances of $24.7 million, $8.4 million and $0.7 million, respectively, were recognized against certain net federal and state deferred tax assets since it is more likely than not that the deferred tax assets will not be realized. The $16.3 million year-over-year change is primarily caused by the federal and state valuation allowances recorded due to ongoing operating losses of the taxable REIT subsidiaries. Additionally, some portion of the change to the valuation allowances relates to changes in the scheduled reversal of taxable temporary differences; and some portion of the change to the state valuation allowance is attributable to state net operating losses generated where the Company has discontinued its operations or reduced its presence in certain state jurisdictions.