Income Taxes

For federal income tax purposes, we elected to be taxed as a REIT under the Internal Revenue 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 federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not qualify as a REIT for four subsequent taxable years. 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, 2016, ten of our hotel properties were leased to TRS lessees TRS and the Ritz-Carlton St. Thomas hotel was owned by our USVI TRS. The TRS entities recognized net book income before income taxes of $5.5 million, $6.0 million and $6.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The following table reconciles the income tax expense at statutory rates to the actual income tax expense recorded (in thousands):



	Year Ended December 31,
	2016			2015			2014
Income tax expense at federal statutory income tax rate of 35%	$	(1,928	)	$	(1,727	)	$	(2,299	)
State income tax expense, net of federal income tax benefit	(172		)	(117		)	(279		)
State and local income tax expense on pass-through entity subsidiaries	(62		)	(86		)	(56		)
Gross receipts and margin taxes	(98		)	(170		)	(193		)
Benefit of USVI Economic Development Commission credit	619			—			—
Other	58			(40		)	(2		)
Valuation allowance	9			1,877			1,732
Total income tax (expense) benefit	$	(1,574	)	$	(263	)	$	(1,097	)

The components of income tax expense are as follows (in thousands):



	Year Ended December 31,
	2016			2015			2014
Current:
Federal	$	(231	)	$	(1,067	)	$	(824	)
State	(269		)	(252		)	(315		)
Foreign	15			(37		)	—
Total current	(485		)	(1,356		)	(1,139		)
Deferred:
Federal	(1,049		)	953			76
State	(40		)	140			(34		)
Foreign	—			—			—
Total deferred	(1,089		)	1,093			42
Total income tax (expense) benefit	$	(1,574	)	$	(263	)	$	(1,097	)

For the years ended December 31, 2016, 2015 and 2014, income tax expense included interest and penalties paid to taxing authorities of $0, $0 and $3,000, respectively. At December 31, 2016 and 2015, we determined that there were no amounts to accrue for interest and penalties due to taxing authorities.

At December 31, 2016 and 2015, our net deferred tax asset, included in “other assets”, and net deferred tax liability, included in “accounts payable and accrued expenses”, respectively, on the consolidated balance sheets, consisted of the following (in thousands):



	December 31,
	2016			2015
Deferred tax assets:
Tax intangibles basis greater than book basis	$	1,227		$	1,214
Allowance for doubtful accounts	30			20
Unearned income	92			108
Unfavorable management contract liability	28			63
Federal and state net operating losses	22,866			22,672
Other	80			8
Accrued expenses	349			256
Tax property basis greater than book basis	4,117			4,429
Prepaid expenses	(2,320		)	(1,158		)
Net deferred tax asset	26,469			27,612
Valuation allowance	(26,968		)	(27,022		)
Net deferred tax asset (liability)	$	(499	)	$	590

At December 31, 2016 and 2015, we recorded a valuation allowance of $27.0 million and $27.0 million, respectively, to partially reserve the deferred tax assets of our TRSs. In 2015, after evaluating positive and negative evidence, including the generation of taxable income during the year ended December 31, 2015, and the carry back potential of certain deferred tax assets, we determined that it is more likely than not that Ashford Prime’s wholly-owned domestic TRS will utilize a portion of its deferred tax assets. As a result, in the year ending December 31, 2015, the valuation allowance decreased by $1.9 million and the related tax effect is included in the non-cash deferred benefit of $1.1 million for the year ended December 31, 2015. Ashford Prime’s wholly-owned domestic TRS continued to generate taxable income in the year ending December 31, 2016 and there continues to be carryback potential of certain deferred tax assets as of December 31, 2016. Primarily as a result of the limitation imposed by the Internal Revenue Code on the utilization of net operating losses of acquired subsidiaries and the history of losses of our USVI TRS, we believe it is more likely than not that $27.0 million of our deferred tax assets will not be realized, and therefore, have provided a valuation allowance to reserve against the balances.

At December 31, 2016, the TRSs had net operating loss carryforwards for federal income tax purposes of $61.3 million that are available to offset future taxable income, if any, through 2023 and 2027, respectively. The $61.3 million of net operating loss carryforwards is attributable to acquired subsidiaries and is subject to substantial limitation on its use. 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,
	2016			2015			2014
Balance at beginning of year	$	27,022		$	3,939		$	3,920
Additions	31			25,043			1,945
Deductions	(85		)	(1,960		)	(1,926		)
Balance at end of year	$	26,968		$	27,022		$	3,939

The USVI TRS operates under a tax holiday in the U.S. Virgin Islands, which is effective through December 31, 2018, and may be extended if certain additional requirements are satisfied. The tax holiday is conditional upon our meeting certain employment and investment thresholds. The impact of this tax holiday decreased current foreign taxes by $126,000 and $332,000 for the years ended December 31, 2016 and 2015, respectively. The benefit of the tax holiday on net income (loss) per share was approximately $0.01 for both 2016 and 2015.