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Income Taxes and Distributions
12 Months Ended
Dec. 31, 2018
Income Taxes and Distributions [Abstract]  
Income Taxes and Distributions
14. Income Taxes and Distributions
As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. We have elected to treat certain of our consolidated subsidiaries as wholly-owned TRSs pursuant to the Code. TRSs may participate in services that would otherwise be considered impermissible for REITs and are subject to federal and state income tax at regular corporate tax rates.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation pursuant to the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate to 21.0%, eliminating the corporate alternative minimum tax, or AMT, and changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
We adopted ASU 2018-05 which allows us to record provisional amounts during the period of enactment. Any change to the provisional amounts would have been recorded as an adjustment to the provision for income taxes in the period the amounts are determined. The measurement period ends when we have obtained, prepared and analyzed the information necessary to finalize the provision, but cannot extend beyond one year of the enactment date. As of December 31, 2018, the measurement period has closed and there were no material changes to the provision for income taxes. The Tax Act is still unclear in some respects and could be subject to potential amendments and technical corrections. The federal income tax rules dealing with U.S. federal income taxation and REITs are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. As a result, the long-term impact of the Tax Act on the overall economy, government revenues, our tenants, us, and the real estate industry cannot be reliably predicted at this time. We continue to work with our tax advisors to determine the full impact that the recent tax legislation as a whole will have on us.
We did not incur income taxes for the years ended December 31, 2017 and 2016. The components of income tax expense for the period then ended is as follows:
 
 
Year Ended
December 31, 2018
Federal deferred
 
$
(2,593,000
)
State deferred
 
(675,000
)
State current
 
8,000

Valuation allowance
 
3,268,000

Total income tax expense
 
$
8,000


Current Income Tax
Federal and state income taxes are generally a function of the level of income recognized by our TRSs.
Deferred Taxes
Deferred income tax is generally a function of the period’s temporary differences (primarily basis differences between tax and financial reporting for real estate assets and equity investments) and generation of tax net operating losses that may be realized in future periods depending on sufficient taxable income.
We recognize the financial statement effects of an uncertain tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on our estimate of the ultimate tax benefit to be sustained if audited by the taxing authority. As of December 31, 2018 and 2017, we did not have any tax benefits or liabilities for uncertain tax positions that we believe should be recognized in our accompanying consolidated financial statements.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A valuation allowance is established if we believe it is more likely than not that all or a portion of the deferred tax assets are not realizable. As of December 31, 2018, our valuation allowance fully reserves the net deferred tax asset due to inherent uncertainty of future income. We will continue to monitor industry and economic conditions, and our ability to generate taxable income based on our business plan and available tax planning strategies, which would allow us to utilize the tax benefits of the net deferred tax assets and thereby allow us to reverse all, or a portion of, our valuation allowance in the future.
Any increases or decreases to the deferred income tax assets or liabilities are reflected in income tax expense (benefit) in our accompanying consolidated statements of operations. We did not have deferred tax assets or liabilities as of December 31, 2016. The components of deferred tax assets as of December 31, 2018 and 2017 was as follows:
 
 Years Ended December 31,
 
2018
 
2017
Deferred income tax assets:
 
 
 
Fixed assets & intangibles
$
2,484,000

 
$
388,000

Expense accruals & other
469,000

 
(41,000
)
Net operating loss
791,000

 
129,000

Valuation allowances
(3,744,000
)
 
(476,000
)
Total deferred income tax assets
$

 
$


At December 31, 2018, we had a net operating loss, or NOL, carryforward of $2,983,000 related to the TRSs. These amounts can be used to offset future taxable income, if any. The NOL carryforwards that were incurred before January 1, 2018 begin to expire in 2037 with respect to the TRSs. The NOL carryforwards incurred after December 31, 2017 will be carried forward indefinitely.
Tax Treatment of Distributions
For federal income tax purposes, distributions to stockholders are characterized as ordinary income, capital gain distributions or nontaxable distributions. Nontaxable distributions will reduce U.S. stockholders’ basis (but not below zero) in their shares. The income tax treatment for distributions reportable for the years ended December 31, 2018, 2017 and 2016 was as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
Ordinary income
$
11,909,000

 
37.7
%
 
$
6,021,000


39.9
%
 
$

 
%
Capital gain

 

 



 

 

Return of capital
19,673,000

 
62.3

 
9,055,000


60.1

 
1,345,000

 
100

 
$
31,582,000

 
100
%
 
$
15,076,000

 
100
%
 
$
1,345,000

 
100
%

Amounts listed above do not include distributions paid on nonvested shares of our restricted common stock which have been separately reported.