Income Taxes

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities of the TRS entities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows (in thousands):



	December 31,
	2018			2017
Deferred tax liabilities:
Real estate and real estate partnership basis differences	$	12,058		$	32,032
Deferred tax assets:
Net operating, capital and other loss carryforwards	$	7,022		$	9,523
Accruals and expenses	7,432			6,575
Tax credit carryforwards	67,530			73,450
Management contracts and other	2,064			200
Total deferred tax assets	84,048			89,748
Valuation allowance	(4,930		)	(25,489		)
Net deferred tax assets	$	67,060		$	32,227

In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act, or the 2017 Act, which is effective for years beginning with 2018. The 2017 Act provided for a reduction in the federal income tax rate. In accordance with GAAP, we revalued our deferred tax assets and liabilities as of December 31, 2017. We finalized our accounting for the tax effects of enactment of the 2017 Act during the year ended December 31, 2018, resulting in our recognition of a cumulative net tax benefit of $15.6 million over the two years.

At December 31, 2018, we had federal and state net operating loss carryforwards, or NOLs, for which the deferred tax asset was approximately $7.0 million, before a valuation allowance of $4.9 million. The NOLs expire in years 2019 to 2034. Subject to certain separate return limitations, we may use these NOLs to offset a portion of state taxable income generated by our TRS entities.

As of December 31, 2018, we had low-income housing and rehabilitation tax credit carryforwards and corresponding deferred tax assets of approximately $67.5 million for income tax purposes that expire in years 2034 to 2038. In light of the lower federal tax rate under the 2017 Act, our TRS entities must generate more taxable income in future years to utilize tax credit carryforwards, which are recorded as deferred tax assets. As a result, during the year ended December 31, 2017, we recognized a partial valuation allowance of $15.4 million against the deferred tax assets associated with low-income housing and rehabilitation tax credit carryforwards. Due to the sale of our Asset Management business, discussed further in Note 3, during the year ended December 31, 2018, we reversed the remaining valuation allowance recognized in 2017 against our deferred tax benefits that we now expect to utilize.

A reconciliation of the beginning and ending balance of our unrecognized tax benefits is presented below (in thousands):



	2018		2017		2016
Balance at January 1	$	2,476	$	2,286	$	2,897
Additions (reductions) based on tax positions related to prior years	142		190		(611		)
Balance at December 31	$	2,618	$	2,476	$	2,286

Because the statute of limitations has not yet elapsed, our United States federal income tax returns for the year ended December 31, 2014 and subsequent years and certain of our State income tax returns for the year ended December 31, 2014 and subsequent years are currently subject to examination by the IRS or other taxing authorities. If recognized, the unrecognized benefit would affect the effective rate.

In 2014, the IRS initiated an audit of the Aimco Operating Partnership’s 2011 and 2012 tax years. This audit remains in process as of December 31, 2018. We do not believe the audit will have any material effect on our unrecognized tax benefits, financial condition or results of operations.

Our policy is to include any interest and penalties related to income taxes within the income tax line item in our consolidated statements of operations.

In accordance with the accounting requirements for stock-based compensation, we may recognize tax benefits in connection with the exercise of stock options by employees of our TRS entities and the vesting of restricted stock awards. We recognize the tax effects related to stock based compensation through earnings in the period the compensation was recognized.

Significant components of the income tax benefit or expense are as follows and are classified within income tax benefit in income before gain on dispositions and gain on dispositions of real estate, net of tax, in our consolidated statements of operations for the years ended December 31, 2018, 2017 and 2016 (in thousands):



	2018			2017			2016
Current:
Federal	$	11,269		$	(938	)	$	5,038
State	10,537			525			2,916
Total current	21,806			(413		)	7,954

Deferred:
Federal	(29,243		)	(10,908		)	(26,173		)
State	(5,590		)	(3,621		)	(623		)
Revaluation of deferred taxes due to change in tax rate	—			(15,894		)	—
Total deferred	(34,833		)	(30,423		)	(26,796		)
Total benefit	$	(13,027	)	$	(30,836	)	$	(18,842	)

Consolidated income or loss subject to tax consists of pretax income or loss of our TRS entities and income and gains retained by the REIT. For the years ended December 31, 2018, 2017 and 2016, we had consolidated net income subject to tax of $158.6 million, net loss subject to tax of $55.6 million and net income subject to tax of $109.3 million, respectively.

The reconciliation of income tax attributable to operations computed at the United States statutory rate to income tax benefit is shown below (dollars in thousands):



	2018					2017					2016
	Amount			Percent		Amount			Percent		Amount			Percent
Tax provision (benefit) at United States statutory rates on consolidated income or loss subject to tax	$	33,296		21.0	%	$	(19,459	)	35.0	%	$	38,257		35.0	%
State income tax expense, net of federal tax (benefit) expense	12,252			7.7	%	(1,769		)	3.2	%	7,152			6.5	%
Establishment of deferred tax asset related to partnership basis difference (1)	—			—	%	(3,501		)	6.3	%	—			—	%
Effect of permanent differences	302			0.2	%	(1,629		)	2.9	%	(132		)	(0.1	)%
Tax effect of intercompany transactions (2)	(33,250		)	(21.0	)%	—			—	%	(47,369		)	(43.3	)%
Tax credits	(6,897		)	(4.4	)%	(9,607		)	17.3	%	(16,750		)	(15.3	)%
Tax reform revaluation (3)	288			0.2	%	(15,894		)	28.6	%	—			—	%
(Decrease) increase in valuation allowance (4)	(20,434		)	(12.9	)%	21,023			(37.8	)%	—			—	%
Other	1,416			0.9	%	—			—	%	—			—	%
Total income tax benefit	$	(13,027	)	(8.3	)%	$	(30,836	)	55.5	%	$	(18,842	)	(17.2	)%


(1)	2017 includes the establishment of a deferred tax asset related to partnership basis difference when it became apparent that it would reverse in the foreseeable future. This deferred tax asset was fully reserved in the valuation allowance described below as of December 31, 2017.

(2)

2016 includes the effect of intercompany asset transfers between the Aimco Operating Partnership and TRS entities, for which tax was deferred and recognized as the assets affected GAAP income or loss, for example, through depreciation, impairment, or upon the sale of the asset to a third-party. Effective January 1, 2017, we adopted a new accounting standard applicable to intercompany asset transfers. As a result, the accumulated unrecognized deferred tax expense associated with historical intercompany transfers was recognized as a cumulative effect adjustment through retained earnings at that time. 2018 includes the tax benefit to establish the initial deferred tax asset from the intercompany transfer of a portion of the Asset Management business between the Aimco Operating Partnership and TRS entities.


(3)	Reflects revaluation of deferred tax assets and liabilities using the TRS entities’ lower effective tax rates resulting from the 2017 Act. Accounting for the tax effects of enactment of the 2017 Act was finalized during the year ended December 31, 2018.


(4)	2017 includes a $15.4 million valuation allowance against the deferred tax assets associated with rehabilitation tax credits due to the lower federal tax rate under the 2017 Act. This valuation allowance was reversed in 2018 as a result of the sale of our Asset Management business.

Income taxes paid totaled approximately $11.5 million, $7.4 million and $2.2 million in the years ended December 31, 2018, 2017 and 2016, respectively.

For income tax purposes, dividends paid to holders of Common Stock primarily consist of ordinary income, capital gains, qualified dividends and unrecaptured Section 1250 gains, or a combination thereof. For the years ended December 31, 2018, 2017 and 2016, dividends per share held for the entire year were estimated to be taxable as follows:



	2018				2017				2016
	Amount		Percentage		Amount		Percentage		Amount		Percentage
Ordinary income	$	0.51	33.4	%	$	0.75	51.5	%	$	0.45	34.2	%
Capital gains	0.93		61.2	%	0.51		35.7	%	0.47		35.4	%
Qualified dividends	—		—	%	0.02		1.6	%	0.13		9.9	%
Unrecaptured Section 1250 gain	0.08		5.4	%	0.16		11.2	%	0.27		20.5	%
	$	1.52	100.0	%	$	1.44	100.0	%	$	1.32	100.0	%