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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 taxed 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 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, 2021, 13 of our hotel properties were leased to TRS lessees and The Ritz-Carlton St. Thomas was owned by our USVI TRS. The TRS entities recognized net book income (loss) before income taxes of $12.6 million, $(27.0) million and $31.0 million for the years ended December 31, 2021, 2020 and 2019, 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,
202120202019
Income tax (expense) benefit at federal statutory income tax rate of 21% $(2,652)$5,619 $(6,509)
State income tax (expense) benefit, net of U.S. federal income tax benefit574 3,136 107 
State and local income tax (expense) benefit on pass-through entity subsidiaries(9)(5)(16)
Gross receipts and margin taxes(26)(13)(67)
Benefit of USVI Economic Development Commission credit3,346 783 5,614 
Other(251)311 16 
Valuation allowance(2,306)(5,425)(909)
Total income tax (expense) benefit$(1,324)$4,406 $(1,764)
The components of income tax expense are as follows (in thousands):
Year Ended December 31,
202120202019
Current:
Federal$(1,477)$3,431 $(765)
State(21)19 (235)
Total current income tax (expense) benefit(1,498)3,450 (1,000)
Deferred:
Federal131 1,262 (357)
State43 (306)(407)
Total deferred income tax (expense) benefit174 956 (764)
Total income tax (expense) benefit$(1,324)$4,406 $(1,764)
For the years ended December 31, 2021, 2020 and 2019, income tax expense included interest and penalties paid to taxing authorities of $3,000, $7,000 and $27,000, respectively. At December 31, 2021 and 2020, we determined that there were no amounts to accrue for interest and penalties due to taxing authorities.
At December 31, 2021 and 2020, our net deferred tax asset, included in “other assets,” and net deferred tax liability, included in “accounts payable and accrued expenses,” respectively, on our consolidated balance sheets, consisted of the following (in thousands):
December 31,
20212020
Deferred tax assets (liabilities):
Tax intangibles basis greater than book basis$722 $718 
Allowance for doubtful accounts28 50 
Unearned income2,147 1,314 
Federal and state net operating losses15,677 14,166 
Capital Loss Carryforward529 523 
Other178 399 
Accrued expenses612 465 
Tax property basis greater than book basis(2,487)(2,721)
Prepaid expenses(4)(91)
Net deferred tax asset17,402 14,823 
Valuation allowance(17,343)(14,938)
Net deferred tax asset (liability)$59 $(115)
At December 31, 2021 and 2020, we recorded a valuation allowance of $17.3 million and $14.9 million, respectively, to partially reserve the deferred tax assets of our TRSs. Primarily as a result of the limitation imposed by the 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 $17.3 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, 2021, we had TRSs net operating loss carryforwards for U.S. federal income tax purposes of $61.2 million, of which $52.3 million is subject to expiration and will begin to expire in 2023. The remainder was generated after December 2017 and is not subject to expiration under the Tax Cuts and Jobs Act. $51.6 million of net operating loss carryforwards are attributable to acquired subsidiaries and are subject to substantial limitation on their 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,
202120202019
Balance at beginning of year$14,938 $11,581 $14,483 
Additions2,405 3,357 — 
Deductions— — (2,902)
Balance at end of year$17,343 $14,938 $11,581 
The USVI TRS operates under a tax holiday in the U.S. Virgin Islands, which is effective through December 31, 2028, 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 $907,000, $0 and $807,000 for the years ended December 31, 2021, 2020 and 2019, respectively. The benefit of the tax holiday on net income (loss) per share was approximately, $0.02, $0.00 and $0.02 for the years ended December 31, 2021, 2020 and 2019, respectively.
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 is 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 $3.4 million 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 is 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.