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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
For U.S. federal income tax purposes, we elected to be treated as a REIT under the Code. To qualify as a REIT, we must meet certain organizational and operational stipulations, including a requirement that we distribute at least 90% of our REIT taxable income, excluding net capital gains, to our stockholders. We currently intend to adhere to these requirements and maintain our REIT status. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax prior to December 31, 2017) and may not qualify as a REIT for four years that are subsequently taxable. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes as well as to federal income and excise taxes on our undistributed taxable income.
At December 31, 2021, all of our 100 hotel properties were leased or owned by Ashford TRS (our taxable REIT subsidiaries). Ashford TRS recognized net book income (loss) of $31.1 million, $(142.0) million and $7.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The following table reconciles the income tax (expense) benefit at statutory rates to the actual income tax (expense) benefit recorded (in thousands):
Year Ended December 31,
202120202019
Income tax (expense) benefit at federal statutory income tax rate of 21%$(6,513)$29,811 $(1,539)
State income tax (expense) benefit, net of U.S. federal income tax benefit(413)4,014 (475)
Permanent differences(238)415 (310)
Provision to return adjustment60 (228)(325)
Gross receipts and margin taxes(199)(347)(923)
Interest and penalties(18)(13)32 
Valuation allowance1,373 (32,317)2,322 
Total income tax (expense) benefit$(5,948)$1,335 $(1,218)
The components of income tax (expense) benefit are as follows (in thousands):
Year Ended December 31,
202120202019
Current:
Federal$(4,950)$826 $(48)
State(885)(549)(1,329)
Total current income tax (expense) benefit(5,835)277 (1,377)
Deferred:
Federal(113)927 126 
State— 131 33 
Total deferred income tax (expense) benefit(113)1,058 159 
Total income tax (expense) benefit$(5,948)$1,335 $(1,218)
For the years ended December 31, 2021, 2020 and 2019 income tax expense includes interest and penalties paid to taxing authorities of $18,000, $11,000 and $56,000, respectively. Additionally, in 2020 we received interest income of $19,000 included in income tax expense. At December 31, 2021 and 2020, we determined that there were no material amounts to accrue for interest and penalties due to taxing authorities.
At December 31, 2021 and 2020, our deferred tax asset (liability) and related valuation allowance consisted of the following (in thousands):
December 31,
20212020
Allowance for doubtful accounts$93 $89 
Unearned income1,119 1,364 
Federal and state net operating losses28,553 30,687 
Capital loss carryforward7,442 7,372 
Accrued expenses1,466 1,263 
Prepaid expenses(44)(121)
Tax property basis less than book basis(2,302)(2,600)
Tax derivatives basis greater than book basis322 296 
Other1,676 1,307 
Deferred tax asset (liability)38,325 39,657 
Valuation allowance(38,810)(40,029)
Net deferred tax asset (liability)$(485)$(372)
At December 31, 2021, we had TRS net operating loss carryforwards for U.S. federal income tax purposes of $119.9 million, of which $10.1 million is subject to expiration and will begin to expire in 2022. The remainder was generated after December 31, 2017 and is not subject to expiration under the Tax Cuts and Jobs Act. The loss carryforwards subject to expiration may be available to offset future taxable income, if any, in 2022 through 2027, with the remainder available to offset taxable income beyond 2027. The net operating loss carryforwards are subject to substantial limitation on their use. At December 31, 2021, Ashford Hospitality Trust, Inc., our REIT, had net operating loss carryforwards for U.S. federal income tax purposes of $885.2 million based on the latest filed tax return. Of that amount, $426.1 million will begin to expire in 2023 and is available to offset future taxable income, if any, through 2036. The remainder was generated after December 31, 2017 and is not subject to expiration under the Tax Cuts and Jobs Act. The net operating loss carryforwards are subject to substantial limitation on their use.
At December 31, 2021 and 2020, we maintained a valuation allowance of $38.8 million and $40.0 million, respectively. At December 31, 2021 and 2020, we have reserved certain deferred tax assets of our TRS entities as we believe it is more likely than not that these deferred tax assets will not be realized. We considered all available evidence, both positive and negative. We concluded that the objectively verifiable negative evidence of a history of consolidated losses and the limitations imposed by the Code on the utilization of net operating losses of acquired subsidiaries outweigh the positive evidence. We believe this treatment is appropriate considering the nature of the intercompany transactions and leases between the REIT and its subsidiaries and that the current level of taxable income at the TRS is primarily attributable to our current transfer pricing arrangements. The transfer pricing arrangements are renewed upon expiration. All existing leases were extended and terms amended in 2020 to reflect the economic impact of COVID-19. Outside consultants prepared the transfer pricing studies supporting the rents from the leases. Outside consultants will continue to provide transfer pricing studies on any newly acquired properties. The intercompany rents are determined in accordance with the arms’ length transfer pricing standard, taking into account the cost of ownership to the REIT among other factors. We do not recognize deferred tax assets and a valuation allowance for the REIT since the REIT distributes its taxable income as dividends to stockholders, and in turn, the stockholders incur income taxes on those dividends.
The following table summarizes the changes in the valuation allowance (in thousands):
Year Ended December 31,
202120202019
Balance at beginning of year$40,029 $7,712 $10,034 
Additions— 32,317 — 
Deductions(1,219)— (2,322)
Balance at end of year$38,810 $40,029 $7,712 
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law and includes certain income tax provisions relevant to businesses. The Company was required to recognize the effect on the consolidated financial statements in the period the law was enacted. For the year ended December 31, 2020, the CARES Act allowed us to record a tax benefit of $858,000 for the 2020 net operating loss at our TRS that was carried back to prior tax years.
On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, and extended several COVID-19 tax related measures passed as part of the “CARES Act.” The Company was required to recognize the effect on the consolidated financial statements in the period the law was enacted, which was the period ended December 31, 2020. The Consolidated Appropriations Act, 2021 did not have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2020.