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, 2019

The provision for income taxes consists of the following:



	Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	532	$	211	$	710
State and Local	109		73		255
Total Current Provision	$	641	$	284	$	965
Deferred:
Federal	$	—	$	—	$	—
State and Local	—		—		—
Total Deferred Provision	$	—	$	—	$	—
Total Provision for Income Taxes	$	641	$	284	$	965

The Company is subject to U.S. federal and state corporate income tax. As of December 31, 2019, the Company has a net operating loss carryforward of approximately $391.6 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.

As of December 31, 2019, the Company has a capital loss carryforward of approximately $27.2 million. The capital loss carryforward will begin to expire in 2022. In addition, the Company has a receivable of $1.1 million related to refundable alternative minimum tax (“AMT”) credits.

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 2016.

The Company has assessed its tax positions for all open years. As of December 31, 2019, the Company reported a total of $1.2 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, 2018	$	721
Increase due to tax positions of current year	471
Balance as of December 31, 2019	$	1,192

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,
	2019		2018		2017
Provision at the statutory rate	21.00	%	21.00	%	35.00	%
Permanent items	(0.62	)%	(1.12	)%	(0.36	)%
State and local taxes	(0.16	)%	(0.15	)%	(0.42	)%
Valuation allowance	(21.11	)%	(19.97	)%	64.46	%
Effects of change in tax rate	—	%	—	%	(101.31	)%
Unrecognized tax benefits	(0.86	)%	(1.84	)%	—	%
Tax credits	—	%	1.36	%	—	%
Other	0.57	%	—	%	0.31	%
Total benefit	(1.18	)%	(0.72	)%	(2.32	)%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2019 and 2018 are presented below:



	December 31,
	2019			2018
Deferred tax assets:
Allowance for loan losses	$	308		$	292
Depreciation and amortization	3,939			8,964
Accrued expenses	2,488			2,701
Interest	3,661			3,445
Operating lease liabilities	56,803			—
Net operating losses	107,415			89,903
Capital losses	7,437			7,352
Deferred revenue	2,124			1,960
Other	5,618			5,306
Total deferred tax assets	189,793			119,923
Less valuation allowance	(123,434		)	(104,705		)
Net deferred tax assets	$	66,359		$	15,218
Deferred tax liabilities:
Leaseholds	—			7,025
Operating lease right-of-use assets	59,716			—
Membership deposit liabilities	6,643			8,193
Total deferred tax liabilities	$	66,359		$	15,218
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, 2019, 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, 2018	$	104,705
Increase due to current year operations	18,729
Valuation allowance at December 31, 2019	$	123,434

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 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.