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Income Taxes | 12 Months Ended
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Dec. 31, 2023
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) 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, 2023, our 90 hotel properties and four Stirling OP hotel properties were leased or owned by our wholly owned or majority owned subsidiaries that are treated as taxable REIT subsidiaries for U.S. federal income tax purposes. Ashford TRS recognized net book income (loss) of $3.7 million, $44.2 million and $31.1 million for the years ended December 31, 2023, 2022 and 2021, 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,
| 2023 |  | 2022 |  | 2021
Income tax (expense) benefit at federal statutory income tax rate of 21% | $ | (761) |  |  | $ | (9,291) |  |  | $ | (6,513) |
State income tax (expense) benefit, net of U.S. federal income tax benefit | (311) |  |  | (1,219) |  |  | (413) |
Permanent differences | (168) |  |  | (2,342) |  |  | (238) |
Provision to return adjustment | 15 |  |  | 1,971 |  |  | 60 |
Gross receipts and margin taxes | (958) |  |  | (506) |  |  | (199) |
Interest and penalties | 184 |  |  | (199) |  |  | (18) |
Valuation allowance | 1,099 |  |  | 5,250 |  |  | 1,373 |
Total income tax (expense) benefit | $ | (900) |  |  | $ | (6,336) |  |  | $ | (5,948) |
The components of income tax (expense) benefit are as follows (in thousands):
| Year Ended December 31,
| 2023 |  | 2022 |  | 2021
Current: |  |  |  |  |
Federal | $ | (195) |  |  | $ | (4,616) |  |  | $ | (4,950) |
State | (733) |  |  | (1,773) |  |  | (885) |
Total current income tax (expense) benefit | (928) |  |  | (6,389) |  |  | (5,835) |
Deferred: |  |  |  |  |
Federal | 28 |  |  | 53 |  |  | (113) |
State | — |  |  | — |  |  | — |
Total deferred income tax (expense) benefit | 28 |  |  | 53 |  |  | (113) |
Total income tax (expense) benefit | $ | (900) |  |  | $ | (6,336) |  |  | $ | (5,948) |
For the years ended December 31, 2023, 2022 and 2021 income tax expense includes interest and penalties paid to/(received from) taxing authorities of $(184,000), $199,000 and $18,000, respectively. At December 31, 2023 and 2022, we determined that there were no material amounts to accrue for interest and penalties due to taxing authorities. At December 31, 2023 and 2022, our deferred tax asset (liability) and related valuation allowance consisted of the following (in thousands):
| December 31,
| 2023 |  | 2022
Deferred tax assets: |  |  |
Allowance for doubtful accounts | $ | 274 |  |  | $ | 104 |
Unearned income | 812 |  |  | 950 |
Federal and state net operating losses | 23,071 |  |  | 22,367 |
Capital loss carryforward | 5,659 |  |  | 7,440 |
Accrued expenses | 1,598 |  |  | 1,781 |
Tax derivatives basis greater than book basis | 307 |  |  | 315 |
Operating lease liability | 2,295 |  |  | 2,368 |
Other | 271 |  |  | 321 |
Deferred tax assets | 34,287 |  |  | 35,646 |
Valuation allowance | (29,302) |  |  | (31,205) |
Net deferred tax asset | 4,985 |  |  | 4,441 |
Deferred tax liabilities: |  |  |
Prepaid expenses | (31) |  |  | (22) |
Investment in partnership | (487) |  |  | — |
Operating lease right-of-use assets | (2,295) |  |  | (2,368) |
Tax property basis less than book basis | (2,576) |  |  | (2,483) |
Deferred tax liabilities | (5,389) |  |  | (4,873) |
Net deferred tax asset (liability) | $ | (404) |  |  | $ | (432) |
At December 31, 2023, we had TRS NOLs for U.S. federal income tax purposes of $94.2 million, however $90.2 million of our NOLs are subject to limitation in the amount of approximately $7.3 million per year through 2025, and $1.2 million per year thereafter under Section 382 of the Internal Revenue Code. NOLs become subject to an annual limitation in the event of certain cumulative changes in the ownership of significant shareholders over a three-year period in excess of 50%, as defined under Section 382 of the Internal Revenue Code. The remaining $4.0 million of our TRS NOLs are not subject to the limitations of Section 382. In total $9.6 million of our TRS NOLs are subject to expiration and will begin to expire in 2024. The remainder was generated after December 31, 2017 and are not subject to expiration under the Tax Cuts and Jobs Act. At December 31, 2023, we had NOLs for U.S. federal income tax purposes of $1.2 billion based on the latest filed tax returns. Utilization of the REIT NOLs subject to Section 382 are limited to approximately $37.2 million per year through 2025, and $9.4 million per year thereafter. $425.2 million of our net operating loss carryforwards will begin to expire in 2024 and are available to offset future taxable income, if any, through 2036. The remainder were generated after December 31, 2017 and are not subject to expiration under the Tax Cuts and Jobs Act. At December 31, 2023 and 2022, we maintained a valuation allowance of $29.3 million and $31.2 million, respectively. At December 31, 2023 and 2022, 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,
| 2023 |  | 2022 |  | 2021
Balance at beginning of year | $ | 31,205 |  |  | $ | 38,810 |  |  | $ | 40,029 |
Additions | — |  |  | — |  |  | — |
Deductions | (1,903) |  |  | (7,605) |  |  | (1,219) |
Balance at end of year | $ | 29,302 |  |  | $ | 31,205 |  |  | $ | 38,810 |

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