Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.8
Income Taxes
 12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes 

COPT elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code. To qualify as a REIT, COPT must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of the Company’s adjusted taxable income to its shareholders. As a REIT, COPT generally will not be subject to Federal income tax on taxable income that it distributes to its shareholders. If COPT fails to qualify as a REIT in any tax year, it will be subject to Federal income tax on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years.

COPLP is a limited partnership and is not subject to federal income tax. Its partners are required to report their respective share of the Operating Partnership’s taxable income on their respective tax returns. COPT’s share of the Operating Partnership’s taxable income is reported on COPT’s income tax return.


The differences between taxable income reported on our income tax returns (estimated 2013 and actual 2012 and 2011) and net income as reported on our consolidated statements of operations are set forth below (in thousands):
 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
2011
 
 
 (Estimated)
 
 
 
 
COPLP consolidated net income (loss)
 
$
101,544

 
$
20,341

 
$
(127,570
)
Adjustments:
 
 
 
 
 
 
Rental revenue recognition
 
(973
)
 
(10,794
)
 
(10,708
)
Compensation expense recognition
 
10,051

 
(2,669
)
 
(1,298
)
Operating expense recognition
 
(1,718
)
 
1,158

 
751

Gain on sales of properties
 
(53,545
)
 
(74,858
)
 
1,154

Impairment losses
 
32,047

 
66,910

 
151,021

Loss on interest rate derivatives
 
—

 
(29,805
)
 
29,805

Gains from non-real estate investments
 
—

 
7,854

 
4,447

Income from service operations
 
1,224

 
1,500

 
(12,078
)
Income tax expense
 
1,978

 
381

 
6,710

Depreciation and amortization
 
23,824

 
24,804

 
44,070

Interest expense
 
1,159

 
3,978

 
5,548

Income from unconsolidated entities
 
(1,462
)
 
(725
)
 
(374
)
COPLP consolidated noncontrolling interests
 
(3,907
)
 
(636
)
 
(1,919
)
Other
 
(624
)
 
(70
)
 
80

COPLP consolidated taxable income
 
$
109,598

 
$
7,369

 
$
89,639

Noncontrolling interests, other
 
(4,930
)
 
(622
)
 
(5,583
)
Other
 
—

 
741

 
(6
)
COPT consolidated taxable income
 
$
104,668

 
$
7,488

 
$
84,050



For Federal income tax purposes, dividends to shareholders may be characterized as ordinary income, capital gains or return of capital. The characterization of dividends declared on COPT’s common and preferred shares during each of the last three years was as follows:
 
 
Common Shares
 
Preferred Shares
 
 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Ordinary income
 
71.8
%
 
33.2
%
 
56.9
%
 
76.2
%
 
100
%
 
85.9
%
Long-term capital gain
 
22.4
%
 
0.0
%
 
9.4
%
 
23.8
%
 
0.0
%
 
14.1
%
Return of capital
 
5.8
%
 
66.8
%
 
33.7
%
 
0.0
%
 
0.0
%
 
0.0
%


We distributed all of COPT’s REIT taxable income in 2013, 2012 and 2011 and, as a result, did not incur Federal income tax in those years on such income.

The net basis of our consolidated assets and liabilities for tax reporting purposes is approximately $324 million lower than the amount reported on our consolidated balance sheet at December 31, 2013, which is primarily related to differences in basis for net properties, intangible assets on property acquisitions and deferred rent receivable.

We own a TRS that is subject to Federal and state income taxes. Our TRS had income (loss) before income taxes under GAAP of $330,000 in 2013, $11.3 million in 2012 and $(27.7) million in 2011. Our TRS’ provision for income tax consisted of the following (in thousands):
 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
2011
Deferred
 
 
 
 
 
 
Federal
 
$
(1,742
)
 
$
(312
)
 
$
5,510

State
 
(236
)
 
(69
)
 
1,219

 
 
(1,978
)
 
(381
)
 
6,729

Current
 
 
 
 
 
 
Federal
 
—

 
—

 
(16
)
State
 
—

 
—

 
(3
)
 
 
—

 
—

 
(19
)
Total income tax (expense) benefit
 
$
(1,978
)
 
$
(381
)
 
$
6,710



A reconciliation of our TRS’ Federal statutory rate to the effective tax rate for income tax reported on our statements of operations is set forth below:
 
 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
2011
Income taxes at U.S. statutory rate
 
34.0
 %
 
34.0
%
 
34.0
%
State and local, net of U.S. Federal tax benefit
 
4.5
 %
 
4.6
%
 
4.6
%
Increase in deferred tax asset valuation allowance
 
562.9
 %
 
0.0
%
 
0.0
%
Other
 
(1.1
)%
 
0.0
%
 
0.0
%
Effective tax rate
 
600.3
 %
 
38.6
%
 
38.6
%


Items in our TRS contributing to temporary differences that lead to deferred taxes include depreciation and amortization, share-based compensation, certain accrued compensation, compensation paid in the form of contributions to a deferred nonqualified compensation plan, impairment losses and net operating losses that are not deductible until future periods. As of December 31, 2013, our TRS had a net operating loss carryforward for federal income tax purposes of approximately $14 million expiring in 2033.

The table below sets forth the tax effects of temporary differences and carry forwards included in the net deferred tax asset of our TRS (in thousands):
 
 
December 31,
 
 
2013
 
2012
Operating loss forward
 
$
5,382

 
$
6,014

Share-based compensation
 
869

 
904

Accrued payroll
 
221

 
12

Property
 
(105
)
 
(111
)
Valuation allowance
 
(2,062
)
 
(207
)
Deferred tax asset, net
 
$
4,305

 
$
6,612



We recognize a valuation allowance on our deferred tax asset if we believe all or some portion of the deferred tax asset may not be realized. An increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in our judgment about the realizability of our deferred tax asset is included in income. In 2013, we recognized a $1.9 million increase in our deferred tax asset valuation allowance due to a decrease in future projected operating income in our TRS resulting primarily from our dispositions of certain properties to which the TRS provided amenity services and our planned reduction in amenity services provided by the TRS at certain other properties. We believe it is more likely than not that the results of future operations in our TRS will generate sufficient taxable income to realize our December 31, 2013 net deferred tax asset.

 We are subject to certain state and local income and franchise taxes. The expense associated with these state and local taxes is included in general and administrative expense and property operating expenses on our consolidated statements of operations. We did not separately state these amounts on our consolidated statements of operations because they are insignificant.