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 $211.0 million and $193.4 million at December 31, 2018 and 2017, respectively.

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



	Year Ended December 31,
	2018			2017			2016
Net income adjusted for noncontrolling interests	$	327,601		$	335,274		$	238,933
Net (income) loss of taxable REIT subsidiary included above	(13,496		)	4,220			(14,497		)
Net income from REIT operations	314,105			339,494			224,436
Book depreciation and amortization	158,607			162,964			162,534
Tax depreciation and amortization	(89,700		)	(95,512		)	(104,734		)
Book/tax difference on gains/losses from capital transactions	19,807			6,261			(64,917		)
Deferred/prepaid/above and below-market rents, net	(15,589		)	(11,146		)	(13,114		)
Impairment loss from REIT operations	10,008			5,071			369
Other book/tax differences, net	(13,718		)	(244		)	(2,694		)
REIT taxable income	383,520			406,888			201,880
Dividends paid deduction⁽¹⁾	(383,520		)	(406,888		)	(201,880		)
Dividends paid in excess of taxable income	$	—		$	—		$	—

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(1)	For 2018, 2017 and 2016, the dividends paid deduction includes designated dividends of $105.7 million, $112.8 million and $16.8 million from 2019, 2018 and 2017, respectively.

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



	Year Ended December 31,
	2018		2017		2016
Ordinary income	42.2	%	23.0	%	80.7	%
Capital gain distributions	57.8	%	77.0	%	19.3	%
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,
	2018			2017
Deferred tax assets:
Impairment loss ⁽¹⁾	$	4,732		$	7,220
Allowance on other assets	3			15
Interest expense	—			5,703
Net operating loss carryforwards ⁽²⁾	11,132			7,428
Straight-line rentals	1,391			916
Book-tax basis differential	1,800			1,676
Other	198			188
Total deferred tax assets	19,256			23,146
Valuation allowance ⁽³⁾	(12,787		)	(15,587		)
Total deferred tax assets, net of allowance	$	6,469		$	7,559
Deferred tax liabilities:
Book-tax basis differential ⁽¹⁾	$	6,005		$	6,618
Other	398			517
Total deferred tax liabilities	$	6,403		$	7,135

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(1)	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.


(2)	We have net operating loss carryforwards of $35.4 million that expire between the years of 2029 and 2037 and $17.6 million that is an indefinite carryforward.


(3)	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 provision (benefit) as follows (in thousands):



	Year Ended December 31,
	2018			2017			2016
Net income (loss) before taxes of taxable REIT subsidiary	$	13,480		$	(5,788	)	$	20,295
Federal provision (benefit) ⁽¹⁾	$	2,831		$	(2,026	)	$	7,103
Valuation allowance decrease	(2,800		)	—			(1,251		)
Effect of change in statutory rate on net deferrals	—			282			—
Other	(46		)	176			(54		)
Federal income tax (benefit) provision of taxable REIT subsidiary ⁽²⁾	(15		)	(1,568		)	5,798
State and local taxes, primarily Texas franchise taxes	1,393			1,551			1,058
Total	$	1,378		$	(17	)	$	6,856

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(1)	At statutory rate of 21% for the year ended December 31, 2018 and 35% for both the year ended December 31, 2017 and 2016.


(2)	All periods from December 31, 2015 through December 31, 2018 are open for examination by the IRS.

Also, a current tax obligation of $1.5 million and $1.6 million has been recorded at December 31, 2018 and 2017, respectively, in association with these taxes.