Drive Shack Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2018

The provision for income taxes consists of the following:



	Year Ended December 31,
	2018		2017		2016
Current:
Federal	$	211	$	710	$	28
State and Local	73		255		64
Total Current Provision	$	284	$	965	$	92

Deferred
Federal	$	—	$	—	$	83
State and Local	—		—		14
Total Deferred Provision	$	—	$	—	$	97

Total Provision for Income Taxes	$	284	$	965	$	189

On February 23, 2017, the Company revoked its election to be treated as a REIT effective January 1, 2017, and as a result, is subject to U.S federal and state corporate income tax. The Company operated in a manner intended to qualify as a REIT for federal income tax purposes through the tax year ending December 31, 2016.

As of December 31, 2018, the Company has a net operating loss carryforward of approximately $331.3 million that is available to offset future U.S. federal taxable income, if and when it arises. The net operating loss carryforward will begin to expire in 2029. A portion of the net operating loss carryforward may be limited in its use due to certain provisions of the Code, including, but not limited to Section 382, which imposes an annual limit on the amount of net operating loss and net capital loss carryforwards that the Company can use to offset future taxable income. The Company experienced an “ownership change” for purposes of Section 382 of the Code in January 2013.

As of December 31, 2018, the Company has a capital loss carryforward of approximately $27.2 million. The capital loss carryforward will begin to expire in 2022.

The Company and its subsidiaries file U.S. federal and state income tax returns in various jurisdictions. Generally, the Company is no longer subject to tax examinations by tax authorities for years prior to 2015. One of the Company’s subsidiaries is currently under IRS examination for the 2014 tax year. At this time, the Company cannot estimate when the examination will conclude or the impact such examination will have on its Consolidated Financial Statements, if any.

The Company has assessed its tax positions for all open years. As of December 31, 2018, the Company recorded $0.7 million of unrecognized tax benefits which, if recognized, would affect the Company’s effective tax rate. The Company does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within the next twelve months.

A reconciliation of the unrecognized tax benefits is as follows:



Balance as of December 31, 2017	$	—
Increase due to tax positions of prior years	568
Increase due to tax positions of current year	153
Balance as of December 31, 2018	$	721

Generally, the Company’s effective tax rate differs from the federal statutory rate as a result of state and local taxes and changes in the valuation allowance.

The difference between the Company's reported provision for income taxes and the U.S. federal statutory rate of 21% is as follows:



	December 31,
	2018		2017		2016
Provision at the statutory rate	21.00	%	35.00	%	35.00	%
Non-taxable REIT income	—	%	—	%	(51.97	)%
Permanent items	(1.12	)%	(0.36	)%	0.23	%
State and local taxes	(0.15	)%	(0.42	)%	0.07	%
Valuation allowance	(19.97	)%	64.46	%	15.56	%
Effects of change in tax rate	—	%	(101.31	)%	—	%
Unrecognized tax benefits	(1.84	)%	—	%	—	%
Tax credits	1.36	%	—	%	—	%
Other	—	%	0.31	%	1.35	%
Total provision (benefit)	(0.72	)%	(2.32	)%	0.24	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2018 and 2017 are presented below:



	December 31,
	2018			2017
Deferred tax assets:
Allowance for loan losses	$	292		$	242
Depreciation and amortization	8,964			26,038
Accrued expenses	2,701			1,936
Interest	3,445			4,538
Net operating losses	89,903			100,297
Capital losses	7,352			6,070
Deferred revenue	1,960			2,295
Other	5,306			2,225
Total deferred tax assets	119,923			143,641
Less valuation allowance	(104,705		)	(106,466		)
Net deferred tax assets	$	15,218		$	37,175
Deferred tax liabilities:
Leaseholds	7,025			8,568
Cancellation of debt	—			23,385
Membership deposit liabilities	8,193			5,222
Total deferred tax liabilities	$	15,218		$	37,175
Net deferred tax assets	$	—		$	—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.

As of December 31, 2018, the Company recorded a full valuation allowance against its net deferred tax assets as management does not believe that it is more likely than not that the net deferred tax assets will be realized.

The following table summarizes the change in the deferred tax asset valuation allowance:



Valuation allowance at December 31, 2017	$	106,466
Decrease due to current year operations	(1,761		)
Valuation allowance at December 31, 2018	$	104,705

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates and eliminating the alternative minimum tax (“AMT”) for corporate taxpayers. The Company has accounted for the effects of the Tax Act for the year ended December 31, 2017 which relates to the re-measure of deferred tax assets and liabilities due to the reduction in the corporate income tax rate and has booked a non-recurring income tax receivable in the amount of $0.6 million due to refundable AMT credits. Due to the full valuation allowance, the re-measure of deferred tax assets and liabilities had no impact on the income tax provision for the year ended December 31, 2017.