Income Taxes

Our Consolidated Financial Statements include the operations of our TRSs, which are not entitled to the dividends paid deduction and are subject to federal, state and local income taxes on its taxable income. During the years ended December 31, 2017, 2016 and 2015, the Company qualified as a REIT and incurred no federal income tax expense; accordingly, the only federal income taxes included in the accompanying Consolidated Financial Statements relate to activities of one of our TRSs.

The components of the income tax provision for the years ended December 31, 2017, 2016 and 2015 are comprised of the following:



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	(859	)	$	(656	)	$	68
State	(344		)	(251		)	(297		)
Deferred:
State	10			(182		)	112
	$	(1,193	)	$	(1,089	)	$	(117	)

Deferred income taxes represent the tax effect of the temporary differences between the book and tax basis of assets and liabilities. New 2017 tax reform legislation reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, our deferred income tax assets and liabilities were re-measured to reflect the reduction in the U.S. corporate income tax rate. As a result, we recorded a decrease related to the net deferred tax assets and a decrease to the associated valuation allowance.

Deferred income tax assets and liabilities include the following as of December 31, 2017 and 2016:



	Year Ended December 31,
	2017			2016
Impairment of Real Estate	$	1,267		$	2,051
Other - Temporary Differences	233			433
Valuation Allowance	(984		)	(2,181		)
Total Deferred Income Tax Assets, Net of Allowance	$	516		$	303
Straight-line Rent	$	(40	)	$	(51	)
Basis Difference - Real Estate Properties	(488		)	(260		)
Other - Temporary Differences	(172		)	(186		)
Total Deferred Income Tax Liabilities	$	(700	)	$	(497	)
Total Net Deferred Income Tax Liabilities	$	(184	)	$	(194	)

A valuation allowance is recorded if we believe it is more likely than not that all or some portion of our deferred income tax assets will not be realized. We do not have projections of future taxable income or other sources of taxable income in the TRSs significant enough to allow us to believe it is more likely than not that we will realize our deferred income tax assets. Therefore, we have recorded a valuation allowance against our deferred income tax assets. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred income tax assets, is included in the current income tax provision.

The income tax provision pertaining to income from continuing operations of the TRSs differs from the amounts computed by applying the applicable federal statutory rate as follows for the years ended December 31, 2017, 2016 and 2015:



	Year Ended December 31,
	2017			2016			2015
Tax (Provision) Benefit at Federal Rate Related to Continuing Operations	$	(1,416	)	$	(1,764	)	$	64
Change in Effective Tax Rate	(609		)	—			—
State Tax Provision, Net of Federal Benefit	(376		)	(462		)	(212		)
Non-deductible Permanent Items, Net	—			7			10
Change in Valuation Allowance	1,197			1,256			787
Other	11			(126		)	(766		)
Net Income Tax Provision	$	(1,193	)	$	(1,089	)	$	(117	)

We evaluate tax positions taken in the financial statements on a quarterly basis under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, we may recognize a tax benefit from an uncertain tax position only if it is "more-likely-than-not" that the tax position will be sustained on examination by taxing authorities. As of December 31, 2017, we do not have any unrecognized tax benefits.

We file income tax returns in the U.S. and various states. The statute of limitations for income tax returns is generally three years. As such, our tax returns that are subject to examination would be primarily from 2014 and thereafter.

Federal Income Tax Treatment of Common Dividends

For income tax purposes, dividends paid to the Company's common shareholders are characterized as ordinary income, capital gains or as a return of a shareholder's invested capital. For the years ended December 31, 2017, 2016 and 2015, the dividends per common share were characterized as follows:



	2017		As a Percentage of Distributions		2016		As a Percentage of Distributions		2015		As a Percentage of Distributions
Ordinary Income	$	0.6552	74.23	%	$	0.6935	82.53	%	$	0.2629	67.93	%
Unrecaptured Section 1250 Gain	0.1627		18.43	%	0.1130		13.45	%	0.1241		32.07	%
Capital Gain	0.0648		7.34	%	0.0066		0.78	%	—		0.00	%
Nondividend Distribution - Return of Capital	—		0.00	%	0.0272		3.24	%	—		0.00	%
	$	0.8827	100.00	%	$	0.8403	100.00	%	$	0.3870	100.00	%

The income tax characterization of dividends to common shareholders is based on the calculation of Taxable Earnings and Profits, as defined in the Code. Taxable Earnings and Profits differ from regular taxable income due primarily to differences in the estimated useful lives and methods used to compute depreciation and in the recognition of gains and losses on the sale of real estate assets.