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Federal Income Tax Reporting | 12 Months Ended
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Dec. 31, 2011
Federal Income Tax Reporting |
Federal Income Tax Reporting |
8. Federal Income Tax Reporting General 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 distributions 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. FSP Investments and FSP Protective TRS Corp. are the Company’s taxable REIT subsidiaries operating as taxable corporations under the Code. FSP Investments operated in the Company’s investment banking segment and in December 2011 announced it would no longer sponsor the syndication of Sponsored REITs, which were a significant amount of FSP Investments activities. Revenues, expenses, and income tax benefits, net of valuation allowances, have been reclassified to discontinued operations for these activities. 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. The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. 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. Net operating losses Section 382 of the Code restricts a corporation’s ability to use net operating losses (“NOLs”) to offset future taxable income following certain “ownership changes.” Such ownership changes occurred with past mergers and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company’s NOLs will expire in 2027. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured. The gross amount of NOLs available to the Company was $13,041,000, as of December 31, 2011, 2010 and 2009. Income Tax Expense The income tax expense reflected in the consolidated statements of income relates primarily to a franchise tax on our Texas properties. FSP Protective TRS Corp. provides taxable services to tenants at some of the Company’s properties and the tax expense associated with these activities are reported in the table as Other Taxes in the table below:
|  | For the years ended December 31, |
(Dollars in thousands) |  | 2011 |  | 2010 |  | 2009 |
Revised Texas franchise tax |  | $ | 253 |  | $ | 217 |  | $ | 242 |
Other Taxes |  | 14 |  | — |  | 6 |
Taxes on income |  | $ | 267 |  | $ | 217 |  | $ | 248 |
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. In May 2006, the State of Texas enacted a new business tax (the “Revised Texas Franchise Tax”) that replaced its existing franchise tax which the Company became subject to. 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 in income taxes on its income statement of $253,000, $217,000 and $242,000 for the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, the Company’s net tax basis of its real estate assets is more than the amount set forth in the Company’s consolidated balance sheets by $20,215,000 and at December 31, 2010 the net tax basis is less than the Company’s consolidated balance sheets by $45,596,000. Reconciliation Between GAAP Net Income and Taxable Income The following reconciles book net income to taxable income for the years ended December 31, 2011, 2010 and 2009.
|  | For the year ended December 31, |
(in thousands) |  | 2011 |  | 2010 |  | 2009 |
Net income per books |  | $ | 43,524 |  | $ | 22,093 |  | $ | 27,872 |
Adjustments to book income: |  |  |  |  |  |  |
Book depreciation and amortization |  | 48,439 |  | 40,724 |  | 39,652 |
Tax depreciation and amortization |  | (31,409 | ) | (26,901 | ) | (25,057 | )
Tax basis more than book basis on assets sold |  | (1,281 | ) | — |  | — |
Straight line rent adjustment, net |  | (9,783 | ) | (4,252 | ) | (1,879 | )
Deferred rent, net |  | 1,290 |  | 275 |  | 34 |
Non-taxable distributions |  | (767 | ) | (2,026 | ) | (2,435 | )
Other, net |  | 2,728 |  | 6,355 |  | 5,445 |
Taxable income |  | 52,741 |  | 36,268 |  | 43,632 |
Less: Capital gains recognized |  | (21,951 | ) | (293 | ) | (55 | )
Taxable income subject to distribution requirement |  | $ | 30,790 |  | $ | 35,975 |  | $ | 43,577 |
Tax Components The following summarizes the tax components of the Company’s common distributions paid per share for the years ended December 31, 2011, 2010 and 2009:
|  | 2011 |  | 2010 |  | 2009 |
|  | Per Share |  | % |  | Per Share |  | % |  | Per Share |  | % |
Ordinary income |  | $ | 0.38 |  | 50.79 | % | $ | 0.46 |  | 60.36 | % | $ | 0.61 |  | 80.56 | %
Capital gain (1) |  | 0.27 |  | 35.17 | % | 0.00 |  | 0.48 | % | 0.00 |  | 0.10 | %
Return of capital |  | 0.11 |  | 14.04 | % | 0.30 |  | 39.16 | % | 0.15 |  | 19.34 | %
Total |  | $ | 0.76 |  | 100 | % | $ | 0.76 |  | 100 | % | $ | 0.76 |  | 100 | %
(1) For 2011, 2010 and 2009 the 29.78%, 0.48% and 0.10% of the total distributions are capital gains taxed at 15%.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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