Sotherly Hotels Inc. Income Taxes Disclosure
12. Income Taxes
The Company has elected to be treated as a REIT under the provision of the Internal Revenue Code, which requires that it distribute at least 90% of its taxable income annually to our stockholders and comply with certain other organizational and operating requirements. As a REIT, the Company is generally not subject to federal corporate income tax on the portion of its taxable income that is paid to stockholders within the same tax year. However, as a REIT, the Company is still subject to certain state and local taxes
on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, its taxable REIT subsidiaries are subject to federal, state and local taxes.
For income tax purposes, dividends paid on the Company’s preferred stock were 100.0% taxable as ordinary non-qualified income.
The components of the income tax expense (benefit) for the years ended December 31, 2025, 2024, and 2023 are as follows:
|
|
Year Ended |
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|
Year Ended |
|
|
Year Ended |
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|||
|
|
December 31, 2025 |
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|
December 31, 2024 |
|
|
December 31, 2023 |
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|||
|
|
|
|
|
|
|
|
|
|
|||
Current: |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
50,120 |
|
|
|
132,491 |
|
|
|
(304,947 |
) |
|
|
|
50,120 |
|
|
|
132,491 |
|
|
|
(304,947 |
) |
Deferred: |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
|
(194,932 |
) |
|
|
(1,109,938 |
) |
|
|
(1,559,177 |
) |
State |
|
|
8,146 |
|
|
|
(210,919 |
) |
|
|
(254,558 |
) |
Subtotals |
|
|
(186,786 |
) |
|
|
(1,320,857 |
) |
|
|
(1,813,735 |
) |
Change in deferred tax valuation allowance |
|
|
186,786 |
|
|
|
1,320,857 |
|
|
|
1,813,735 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Income tax expense (benefit) |
|
$ |
50,120 |
|
|
$ |
132,491 |
|
|
$ |
(304,947 |
) |
A reconciliation of the U.S. statutory federal income tax expense (benefit) to the Company’s provision for income tax is as follows:
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Year Ended |
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|
December 31, 2025 |
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Statutory federal income tax expense (benefit) |
|
$ |
(1,623,092 |
) |
|
|
21.0 |
|
% |
Nontaxable and nondeductible items |
|
|
|
|
|
|
|
||
Federal tax impact of REIT election |
|
|
1,433,531 |
|
|
|
(18.6 |
) |
% |
Federal impact of PPP loan forgiveness |
|
|
— |
|
|
|
— |
|
% |
State income taxes, net of federal income tax effect (1) |
|
|
52,895 |
|
|
|
(0.7 |
) |
% |
Change in valuation allowance |
|
|
186,786 |
|
|
|
(2.4 |
) |
% |
Income tax expense (benefit) |
|
$ |
50,120 |
|
|
|
(0.7 |
) |
% |
|
|
|
|
|
|
|
|
||
(1) For the year ended December, 31 2025 , state and local income taxes in Texas comprise the majority |
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(greater than 50 percent) of the tax effect in this category. |
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|
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||
|
|
Year Ended |
|
|
Year Ended |
|
||
|
|
December 31, 2024 |
|
|
December 31, 2023 |
|
||
Statutory federal income tax expense |
|
$ |
275,593 |
|
|
$ |
736,001 |
|
Federal tax impact of REIT election |
|
|
(1,357,871 |
) |
|
|
(2,231,835 |
) |
Statutory federal income tax expense (benefit) at TRS |
|
|
(1,082,278 |
) |
|
|
(1,495,834 |
) |
Federal impact of PPP loan forgiveness |
|
|
— |
|
|
|
(56,470 |
) |
State income tax benefit, net of federal expense (benefit) |
|
|
(106,088 |
) |
|
|
(566,378 |
) |
Change in valuation allowance |
|
|
1,320,857 |
|
|
|
1,813,735 |
|
Income tax expense (benefit) |
|
$ |
132,491 |
|
|
$ |
(304,947 |
) |
The Company paid income taxes as follows:
|
|
Year Ended |
|
|
|
|
December 31, 2025 |
|
|
|
|
|
|
|
U.S. federal |
|
$ |
— |
|
U.S. state and local |
|
|
|
|
Maryland |
|
|
38,712 |
|
Pennsylvania |
|
|
60,691 |
|
Texas |
|
|
43,886 |
|
Other |
|
|
75 |
|
Total U.S. state and local |
|
|
143,364 |
|
Total income taxes paid, net of refunds |
|
$ |
143,364 |
|
Deferred income taxes are recognized for temporary differences between the financial reporting bases of asset and liabilities and their respective tax bases and for operating losses and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realizable based on consideration of available evidence, including future reversal of taxable temporary differences, projected taxable income and tax planning strategies.
Due to the uncertainty of realizing the loss in future years attributable to the changes in travel demand and market conditions in various markets in which the Company does business and the effectiveness of the Company’s tax planning strategies, as of December 31, 2025, the Company believes it is more likely than not that the Company will not realize the benefits of these assets. Therefore, the Company has determined that a full valuation allowance should be recorded against the deferred tax asset. The amount of the deferred tax assets considered unrealizable, however, could change in the future based on revised estimates of future taxable income during the carryforward period.
The significant components of our deferred tax asset as of December 31, 2025 and 2024, are as follows:
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|
Year Ended |
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|
Year Ended |
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||
|
|
December 31, 2025 |
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|
December 31, 2024 |
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Deferred tax asset: |
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|
|
|
|
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||
Net operating loss carryforwards |
|
$ |
13,321,350 |
|
|
$ |
13,247,852 |
|
Accrued compensation |
|
|
123,117 |
|
|
|
549,538 |
|
Accrued expenses and other |
|
|
1,056,700 |
|
|
|
516,991 |
|
|
|
|
14,501,167 |
|
|
|
14,314,381 |
|
Less: Valuation allowance |
|
|
(14,501,167 |
) |
|
|
(14,314,381 |
) |
Total |
|
$ |
— |
|
|
$ |
— |
|
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Apr 15, 2026 | Showing above |
| 2024 | Mar 31, 2025 | |
| 2023 | Mar 22, 2024 | |
| 2022 | Mar 21, 2023 | |
| 2021 | Mar 25, 2022 | |
| 2020 | Mar 24, 2021 | |
| 2019 | Mar 16, 2020 | |
| 2018 | Mar 15, 2019 | |
| 2017 | Mar 16, 2018 | |
| 2016 | Mar 23, 2017 | |
| 2015 | Mar 25, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.