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Income Taxes
9 Months Ended
Sep. 30, 2011
Income Taxes 
Income Taxes

10.      Income Taxes

 

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, the Company generally is entitled to a tax deduction for dividends paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only.  The Company must comply with a variety of restrictions to maintain its status as a REIT.  These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.

 

One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary (“TRS”).  In the case of TRSs, the Company’s ownership of securities in all TRSs generally cannot exceed 25% of the value of all of the Company’s assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company’s assets.   Effective January 1, 2002, a subsidiary of the Company, FSP Investments LLC, became a TRS.  As a result, FSP Investments LLC, which is part of the Company’s investment banking/investment services segment, operates as a taxable corporation under the Code.

 

Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities.  In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.

 

Accrued interest and penalties will be recorded as income tax expense if the Company records a liability in the future.  The Company and one or more of its subsidiaries files income tax returns in the U.S federal jurisdiction and various state jurisdictions.  The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2008 and thereafter.

 

The income tax expense (benefit) reflected in the condensed consolidated statements of income relates to the TRSs and Texas Franchise tax. The expense (benefit) differs from the amounts computed by applying the federal statutory rate to income before taxes as follows:

 

 

 

For the

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Federal income tax expense (benefit) at statutory rate

 

$

20

 

$

(526

)

Increase (decrease) in taxes resulting from:

 

 

 

 

 

State income tax (benefit), net of federal impact

 

-

 

(96

)

Valuation allowance on tax benefit

 

(17

)

360

 

Revised Texas franchise tax

 

182

 

161

 

Income tax expense (benefit)

 

$

185

 

$

(101

)

 

Taxes on income are a current tax expense.  No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRSs.  For the nine months ended September 30, 2011 a release of $17,000 of the valuation allowance on the federal tax benefit was used to offset the 2011 tax expense of FSP Investments LLC.  A valuation allowance of approximately $360,000 was recorded to reduce the tax benefit resulting from the 2010 loss attributable to FSP Investments LLC as future use of the tax benefit at the federal and state level may be uncertain.

In May 2006, the State of Texas enacted a business tax (the “Revised Texas Franchise Tax”) that replaced its existing franchise tax.

The Revised Texas Franchise Tax is a tax at a rate of approximately 0.7% of revenues at Texas properties commencing with 2007 revenues.  Some of the Company’s leases allow reimbursement by tenants for these amounts because the Revised Texas Franchise Tax replaces a portion of the property tax for school districts. Because the tax base on the Revised Texas Franchise Tax is derived from an income based measure it is considered an income tax. The Company recorded a provision for income taxes on its condensed consolidated statement of income of $182,000 and $161,000 for the nine months ended September 30, 2011 and 2010, respectively.