Income Tax Considerations

We qualify as a REIT under the provisions of the Internal Revenue Code, and therefore, no tax is imposed on our taxable income distributed to shareholders. To maintain our REIT status, we must distribute at least 90% of our ordinary taxable income to our shareholders and meet certain income source and investment restriction requirements. Our shareholders must report their share of income distributed in the form of dividends.

Taxable income differs from net income for financial reporting purposes primarily because of differences in the timing of recognition of depreciation, rental revenue, repair expense, compensation expense, impairment losses and gain from sales of property. As a result of these differences, the book value of our net fixed assets is in excess of tax basis by $193.4 million and $268.7 million at December 31, 2017 and 2016, respectively.

The following table reconciles net income adjusted for noncontrolling interests to REIT taxable income (in thousands):



	Year Ended December 31,
	2017			2016			2015
Net income adjusted for noncontrolling interests	$	335,274		$	238,933		$	174,352
Net loss (income) of taxable REIT subsidiary included above	4,220			(14,497		)	340
Net income from REIT operations	339,494			224,436			174,692
Book depreciation and amortization	162,964			162,534			145,940
Tax depreciation and amortization	(95,512		)	(104,734		)	(87,416		)
Book/tax difference on gains/losses from capital transactions	6,261			(64,917		)	(53,902		)
Deferred/prepaid/above and below-market rents, net	(11,146		)	(13,114		)	(5,375		)
Impairment loss from REIT operations	5,071			369			1,536
Other book/tax differences, net	(244		)	(2,694		)	(1,679		)
REIT taxable income	406,888			201,880			173,796
Dividends paid deduction⁽¹⁾	(406,888		)	(201,880		)	(174,628		)
Dividends paid in excess of taxable income	$	—		$	—		$	(832	)

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(1)	For 2017 and 2016, the dividends paid deduction includes designated dividends of $112.8 million and $16.8 million from 2018 and 2017, respectively.

For federal income tax purposes, the cash dividends distributed to common shareholders are characterized as follows:



	Year Ended December 31,
	2017		2016		2015
Ordinary income	23.0	%	80.7	%	92.7	%
Capital gain distributions	77.0	%	19.3	%	4.3	%
Return of capital (nontaxable distribution)	—	%	—	%	3.0	%
Total	100.0	%	100.0	%	100.0	%

Our deferred tax assets and liabilities, including a valuation allowance, consisted of the following (in thousands):



	December 31,
	2017			2016
Deferred tax assets ⁽¹⁾:
Impairment loss ⁽²⁾	$	7,220		$	13,476
Allowance on other assets	15			117
Interest expense	5,703			9,246
Net operating loss carryforwards ⁽³⁾	7,428			8,413
Straight-line rentals	916			813
Book-tax basis differential	1,676			4,380
Other	188			348
Total deferred tax assets	23,146			36,793
Valuation allowance ⁽⁴⁾	(15,587		)	(25,979		)
Total deferred tax assets, net of allowance	$	7,559		$	10,814
Deferred tax liabilities ⁽¹⁾:
Book-tax basis differential ⁽²⁾	$	6,618		$	10,998
Other	517			553
Total deferred tax liabilities	$	7,135		$	11,551

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(1)	As of December 31, 2017 and 2016, deferred tax assets and liabilities were measured at the statutory rate of 21% and 35%, respectively, as a result of the enactment of the Tax Act on December 22, 2017.


(2)	Impairment losses and book-tax basis differential liabilities will not be recognized until the related properties are sold. Realization of impairment losses is dependent upon generating sufficient taxable income in the year the property is sold.


(3)	We have net operating loss carryforwards of $35.4 million that expire between the years of 2029 and 2037.


(4)	Management believes it is more likely than not that a portion of the deferred tax assets, which primarily consists of impairment losses, interest expense and net operating losses, will not be realized and established a valuation allowance. However, the amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income are reduced.

We are subject to federal, state and local income taxes and have recorded an income tax (benefit) provision as follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Net (loss) income before taxes of taxable REIT subsidiary	$	(5,788	)	$	20,295		$	(989	)
Federal (benefit) provision at statutory rate of 35%	$	(2,026	)	$	7,103		$	(346	)
Valuation allowance decrease	—			(1,251		)	(309		)
Effect of change in statutory rate on net deferrals	282			—			—
Other	176			(54		)	6
Federal income tax (benefit) provision of taxable REIT subsidiary ⁽¹⁾	(1,568		)	5,798			(649		)
Texas franchise tax	1,551			1,058			701
Total	$	(17	)	$	6,856		$	52

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(1)	All periods presented are open for examination by the IRS.

Also, a current tax obligation of $1.6 million and $1.0 million has been recorded at December 31, 2017 and 2016, respectively, in association with these taxes.