Federal Income Taxes

12 Months Ended

Dec. 31, 2018

14. Federal Income Taxes

The Company has elected to qualify as a REIT in accordance with Sections 856 through 860 of the Code, and intends at all times to qualify as a REIT under the Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual REIT taxable income to its shareholders. As a REIT, the Company generally will not be subject to corporate Federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Code. As the Company distributed sufficient taxable income for the years ended December 31, 2018, 2017 and 2016, no U.S. Federal income or excise taxes were incurred. If the Company fails to qualify as a REIT in any taxable year, it will be subject to Federal income taxes at the regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even though the Company qualifies for taxation as a REIT, the Company is subject to certain state and local taxes on its income and property and Federal income and excise taxes on any undistributed taxable income. In addition, taxable income from non-REIT activities managed through the Company’s TRS’s is subject to Federal, state and local income taxes. No more than 20% of the value of our total assets may consist of the securities of one or more taxable REIT subsidiaries.

In the normal course of business, the Company or one or more of its subsidiaries is subject to examination by Federal, state and local jurisdictions as well as certain jurisdictions outside the United States, in which it operates, where applicable. The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense. For the three years ended December 31, 2018, the Company recognized no material adjustments regarding its tax accounting treatment for uncertain tax provisions. As of December 31, 2018, the tax years that remain subject to examination by the major tax jurisdictions under applicable statutes of limitations are generally the year 2015 and forward.

Reconciliation of Net Income to Taxable Income

Reconciliation of GAAP net income attributable to Acadia to taxable income is as follows:

	Year Ended December 31,
(in thousands)	2018			2017			2016
Net income attributable to Acadia	$	31,439		$	61,470		$	72,776
Deferred cancellation of indebtedness income		2,050			2,050			2,050
Deferred rental and other income ^(a)		1,222			(934	)		1,610
Book/tax difference - depreciation and amortization ^(a)		23,166			21,334			15,189
Straight-line rent and above- and below-market rent adjustments ^(a)		(12,129	)		(10,559	)		(7,882	)
Book/tax differences - equity-based compensation		6,042			5,325			10,307
Joint venture equity in earnings, net ^(a)		13,905			9,114			(2,011	)
Impairment charges and reserves		—			—			769
Acquisition costs ^(a)		326			1,135			5,116
Gains		—			(5,181	)		—
Book/tax differences - miscellaneous		(2,821	)		930			(4,924	)
Taxable income	$	63,200		$	84,684		$	93,000
Distributions declared	$	89,122		$	87,848		$	91,053

(a)	Adjustments from certain subsidiaries and affiliates, which are consolidated for financial reporting but not for tax reporting, are included in the reconciliation item “Joint venture equity in earnings, net.”

Characterization of Distributions

The Company has determined that the cash distributed to the shareholders for the periods presented is characterized as follows for Federal income tax purposes:

	Year Ended December 31,
	2018					2017					2016
	Per Share		%			Per Share		%			Per Share		%
Ordinary income - Non-Section 199A		—		—	%	$	0.82		78	%	$	0.77		66	%
Ordinary income - Section 199A	$	0.87		100	%		—		—	%		—		—	%
Qualified dividend		—		—	%		—		—	%		—		—	%
Capital gain		—		—	%		0.23		22	%		0.39		34	%
Total ^(b)	$	0.87		100	%	$	1.05		100	%	$	1.16		100	%

(b)	The fourth quarter 2018 regular dividend was $0.28 per common share of which approximately $0.06 was allocable to 2018 and approximately $0.22 is allocable to 2019.

Taxable REIT Subsidiaries

Income taxes have been provided for using the liability method as required by ASC Topic 740, “Income Taxes.” The Company’s TRS income and provision for income taxes associated with the TRS for the periods presented are summarized as follows (in thousands):

	Year Ended December 31,
	2018			2017			2016
TRS loss before income taxes	$	(2,609	)	$	(3,604	)	$	(1,583	)
(Provision) benefit for income taxes:
Federal		(377	)		(982	)		378
State and local		26			423			97
TRS net loss before noncontrolling interests		(2,960	)		(4,163	)		(1,108	)
Noncontrolling interests		4			8			(9	)
TRS net loss	$	(2,956	)	$	(4,155	)	$	(1,117	)

The income tax provision for the Company differs from the amount computed by applying the statutory Federal income tax rate to income before income taxes as follows. Amounts are not adjusted for temporary book/tax differences (in thousands):

	Year Ended December 31,
	2018			2017			2016
Federal tax benefit at statutory tax rate	$	(548	)	$	(1,225	)	$	(538	)
TRS state and local taxes, net of Federal benefit		(165	)		(190	)		(84	)
Tax effect of:
Permanent differences, net		951			1,131			1,663
Prior year over-accrual, net		—			(1,541	)		—
Effect of Tax Cuts and Jobs Act		—			1,982			—
Other		172			404			(1,516	)
REIT state and local income and franchise taxes		524			443			370
Total provision (benefit) for income taxes	$	934		$	1,004		$	(105	)

As of December 31, 2018, and 2017, the Company’s deferred tax assets (net of applicable reserves) in its taxable REIT subsidiaries consisted of the following: additional tax basis in RCP investments of $0 and $1.0 million, capital loss carryovers of $0.1 million and $0 and net operating loss carryovers of $2.0 million and $1.1 million, respectively.