CorEnergy Infrastructure Trust, 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

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. Components of the Company's deferred tax assets and liabilities as of December 31, 2019 and 2018, are as follows:



Deferred Tax Assets and Liabilities
	December 31, 2019			December 31, 2018
Deferred Tax Assets:
Deferred contract revenue	$	1,529,473		$	1,691,899
Net operating loss carryforwards	5,622,052			5,424,671
Loan loss provision	—			263,508
Accrued liabilities	424,604			83,325
Capital loss carryforward	104,595			—
Other	6,184			12,370
Sub-total	$	7,686,908		$	7,475,773
Valuation allowance	(104,595		)	—
Sub-total	$	7,582,313		$	7,475,773
Deferred Tax Liabilities:
Cost recovery of leased and fixed assets	$	(2,953,319	)	$	(2,508,547	)
Other	(35,433		)	(19,023		)
Sub-total	$	(2,988,752	)	$	(2,527,570	)
Total net deferred tax asset	$	4,593,561		$	4,948,203

As of December 31, 2019, the total deferred tax assets and liabilities presented above relate to the Company's TRSs. The Company recognizes the tax benefits of uncertain tax positions only when the position is "more likely than not" to be sustained upon examination by the tax authorities based on the technical merits of the tax position. The Company's policy is to record interest and penalties on uncertain tax positions as part of tax expense. Tax years subsequent to the year ended December 31, 2015, remain open to examination by federal and state tax authorities.

For the year ending December 31, 2019, the Company generated a capital loss carryforward resulting from the liquidation of Lightfoot. The amount of the carryforward for tax purposes was approximately $500 thousand, and if not utilized, this carryforward will expire as of December 31, 2024. Management assessed the available evidence and determined that it is more likely than not that the capital loss carryforward will not be utilized prior to expiration. Due to the uncertainty of realizing this deferred tax asset, a valuation allowance of $105 thousand was recorded equal to the amount of the tax benefit of this carryforward at December 31, 2019. In the future, if the Company concludes, based on existence of sufficient evidence, that it should realize more or less of its deferred tax assets, the valuation allowance will be adjusted accordingly in the period such conclusion is made.

The Tax Cuts and Jobs Act (the "2017 Tax Act") was enacted on December 22, 2017. The 2017 Tax Act reduced the US federal corporate tax rate from 35 percent to 21 percent. The 2017 Tax Act also repealed the alternative minimum tax for corporations. In December 2018, the Company completed its accounting for the tax effects of enactment of the 2017 Tax Act as allowed under SEC Staff Accounting Bulletin 118. The Company remeasured deferred tax assets and liabilities based on the updated rates at which they are expected to reverse in the future, which resulted in a $1.3 million transition adjustment that reduced net deferred tax assets. One of the Company's TRSs qualifies for the regulated utility and real property business exceptions under the new proposed treasury regulations for Section 163(j). Therefore, previously disqualified interest from years prior to 2018 was deducted and resulted in a reclassification from other deferred tax assets to deferred tax assets for net operating loss carryforwards during the year ended December 31, 2018. Refer to additional discussion of the Company's net operating loss carryforwards below. The Company will continue to assess the impact of new tax legislation, as well as any future regulations and updates provided by the tax authorities.

Total income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate of 21 percent for the years ended December 31, 2019 and December 31, 2018 and 35 percent for the year ended December 31, 2017, to income or loss from operations and other income and expense for the years presented, as follows:



Income Tax Expense (Benefit)
	For the Years Ended December 31,
	2019			2018			2017
Application of statutory income tax rate	$	904,111		$	8,671,562		$	12,231,838
State income taxes, net of federal tax benefit	409,839			(583,186		)	352,708
Income of Real Estate Investment Trust not subject to tax	(941,900		)	(10,339,520		)	(11,975,853		)
Tax reform impact	—			—			1,262,444
Other	(137,432		)	(167,582		)	474,181
Total income tax expense (benefit)	$	234,618		$	(2,418,726	)	$	2,345,318

Total income taxes are computed by applying the federal statutory rate of 21 percent plus a blended state income tax rate. Corridor Public and Corridor Private had a blended state rate of approximately 5.53 percent and 3.78 percent for the years ended December 31, 2018 and 2017, respectively. In the first quarter of 2019, the state rate for Corridor Public and Corridor Private was adjusted to zero for current and future state liabilities. The decrease in the state rate was the result of the 2018 sale or disposition of assets within the investments held by Corridor Private. CorEnergy BBWS had a blended state income tax rate of approximately 5 percent for the years ended December 31, 2019 and 2018 due to its operations in Missouri. CorEnergy BBWS did not record a provision for state income taxes for the year ended December 31, 2017 because it only operated in Wyoming, which does not have state income tax. Because Corridor MoGas primarily only operates in the state of Missouri, a blended state income tax rate of 5 percent was used for the operation of the TRS for the years ended December 31, 2019, 2018 and 2017. For CorEnergy BBWS and Corridor MoGas, the blended state rate includes the enacted decrease in the Missouri state income tax rate effective in 2020. As a result of the decreased rate, additional deferred state income taxes of $315 thousand resulting from the application of the newly enacted rate to existing deferred balances was recorded in the first quarter of 2019. Prior to its reorganization to a QRS at the end of 2017, Mowood Corridor, Inc. had a blended state income tax rate of 5 percent for the year ended December 31, 2017.

For the years ended December 31, 2019, 2018 and 2017, all of the income tax expense (benefit) presented above relates to the assets and activities held in the Company's TRSs. The components of income tax expense (benefit) include the following for the periods presented:



Components of Income Tax Expense (Benefit)
	For the Years Ended December 31,
	2019			2018			2017
Current tax expense (benefit)
Federal	$	(159,381	)	$	(413,248	)	$	2,498,363
State (net of federal tax benefit)	39,357			(172,138		)	333,295
Total current tax expense (benefit)	$	(120,024	)	$	(585,386	)	$	2,831,658
Deferred tax expense (benefit)
Federal	$	(15,840	)	$	(1,422,292	)	$	(505,753	)
State (net of federal tax benefit)	370,482			(411,048		)	19,413
Total deferred tax expense (benefit)	$	354,642		$	(1,833,340	)	$	(486,340	)
Total income tax expense (benefit), net	$	234,618		$	(2,418,726	)	$	2,345,318

As of December 31, 2019 and 2018, the TRSs had a cumulative net operating loss of $23.5 million and $17.1 million, respectively. Net operating losses of $19.8 million generated during the years ended December 31, 2019 and 2018 may be carried forward indefinitely, subject to limitation. Net operating losses generated for years prior to December 31, 2018 may be carried forward for 20 years. If not utilized, the net operating loss will expire as follows: $328 thousand, $176 thousand, $1.2 million and $2.0 million in the years ending December 31, 2034, 2035, 2036 and 2037, respectively.

The aggregate cost of securities for federal income tax purposes and securities with unrealized appreciation and depreciation, were as follows:



Aggregate Cost of Securities for Income Tax Purposes
	December 31, 2019		December 31, 2018
Aggregate cost for federal income tax purposes	$	345,241	$	408,051
Gross unrealized appreciation	—		—
Gross unrealized depreciation	—		—
Net unrealized appreciation	$	—	$	—

The Company provides the following tax information to its common stockholders pertaining to the character of distributions paid during tax years 2019, 2018 and 2017. For a common stockholder that received all distributions in cash during 2019, 65.1 percent will be treated as ordinary dividend income, 32.9 percent will be treated as return of capital and 2.0 percent will be treated as capital gain distributions. Of the ordinary dividend income, none will be treated as qualified dividend income for a non-corporate taxpayer; all of the ordinary dividend income may be taken into account on an individual's section 199A deduction, subject to the applicable holding period. Of the capital gain distribution, 100.0 percent is subject to a maximum 20 percent federal income tax rate. The per share characterization by quarter is reflected in the following tables:



2019 Common Stock Tax Information
Record Date	Ex-Dividend Date	Payable Date	Total Distribution per Share		Total Ordinary Dividends		Qualified Dividends		Capital Gain Distributions		Nondividend Distributions		Section 199A Dividends
2/14/2019	2/13/2019	2/28/2019	$	0.7500	$	0.5803	$	—	$	0.0156	$	0.1541	$	0.5803
5/17/2019	5/16/2019	5/31/2019	0.7500		0.4578		—		0.0150		0.2772		0.4578
8/16/2019	8/15/2019	8/30/2019	0.7500		0.4578		—		0.0150		0.2772		0.4578
11/15/2019	11/14/2019	11/29/2019	0.7500		0.4578		—		0.0150		0.2772		0.4578
Total 2019 Distributions			$	3.0000	$	1.9537	$	—	$	0.0606	$	0.9857	$	1.9537



2018 Common Stock Tax Information
Record Date	Ex-Dividend Date	Payable Date	Total Distribution per Share		Total Ordinary Dividends		Qualified Dividends		Capital Gain Distributions		Unrecaptured Section 1250 Gain		Section 199A Dividends
2/14/2018	2/13/2018	2/28/2018	$	0.7500	$	0.5346	$	—	$	0.2154	$	0.1007	$	0.5346
5/17/2018	5/16/2018	5/31/2018	0.7500		0.5346		—		0.2154		0.1007		0.5346
8/17/2018	8/16/2018	8/31/2018	0.7500		0.5346		—		0.2154		0.1007		0.5346
11/15/2018	11/14/2018	11/30/2018	0.7500		0.5346		—		0.2154		0.1007		0.5346
Total 2018 Distributions			$	3.0000	$	2.1384	$	—	$	0.8616	$	0.4028	$	2.1384



2017 Common Stock Tax Information
Record Date	Ex-Dividend Date	Payable Date	Total Distribution per Share		Total Ordinary Dividends		Qualified Dividends		Capital Gain Distributions		Nondividend Distributions
2/13/2017	2/9/2017	2/28/2017	$	0.7500	$	0.5925	$	0.0785	$	—	$	0.1575
5/16/2017	5/12/2017	5/31/2017	0.7500		0.5925		0.0785		—		0.1575
8/17/2017	8/15/2017	8/31/2017	0.7500		0.5925		0.0785		—		0.1575
11/15/2017	11/14/2017	11/30/2017	0.7500		0.5925		0.0785		—		0.1575
Total 2017 Distributions			$	3.0000	$	2.3700	$	0.3140	$	—	$	0.6300

The Company provides the following tax information to its preferred stockholders pertaining to the character of distributions paid during the 2019, 2018 and 2017 tax years. For a preferred stockholder that received all distributions in cash during 2019, 96.9 percent will be treated as ordinary dividend income, none will be treated as return of capital and 3.1 percent will be treated as capital gain distributions. Of the ordinary dividend income, none will be treated as qualified dividend income for a non-corporate taxpayer; all of the ordinary dividend income may be taken into account on an individual's section 199A deduction, subject to the applicable holding period. Of the capital gain distribution, 100.0 percent is subject to a maximum 20 percent federal income tax rate. The per share characterization by quarter is reflected in the following tables:



2019 Preferred Stock Tax Information
Record Date	Ex-Dividend Date	Payable Date	Total Distribution per Share		Total Ordinary Dividends		Qualified Dividends		Capital Gain Distributions		Nondividend Distributions		Section 199A Dividends
2/14/2019	2/13/2019	2/28/2019	$	0.4609	$	0.4483	$	—	$	0.0126	$	—	$	0.4483
5/17/2019	5/16/2019	5/31/2019	0.4609		0.4463		—		0.0146		—		0.4463
8/16/2019	8/15/2019	8/30/2019	0.4609		0.4463		—		0.0146		—		0.4463
11/15/2019	11/14/2019	11/29/2019	0.4609		0.4463		—		0.0146		—		0.4463
Total 2019 Distributions			$	1.8436	$	1.7872	$	—	$	0.0564	$	—	$	1.7872



2018 Preferred Stock Tax Information
Record Date	Ex-Dividend Date	Payable Date	Total Distribution per Share		Total Ordinary Dividends		Qualified Dividends		Capital Gain Distributions		Unrecaptured Section 1250 Gain		Section 199A Dividends
2/14/2018	2/13/2018	2/28/2018	$	0.4609	$	0.3285	$	—	$	0.1324	$	0.0619	$	0.3285
5/17/2018	5/16/2018	5/31/2018	0.4609		0.3285		—		0.1324		0.0619		0.3285
8/17/2018	8/16/2018	8/31/2018	0.4609		0.3285		—		0.1324		0.0619		0.3285
11/15/2018	11/14/2018	11/30/2018	0.4609		0.3285		—		0.1324		0.0619		0.3285
Total 2018 Distributions			$	1.8436	$	1.3140	$	—	$	0.5296	$	0.2476	$	1.3140



2017 Preferred Stock Tax Information
Record Date	Ex-Dividend Date	Payable Date	Total Distribution per Share		Total Ordinary Dividends		Qualified Dividends		Capital Gain Distributions		Nondividend Distributions
02/13/2017	2/9/2017	2/28/2017	$	0.4609	$	0.4609	$	0.0611	$	—	$	—
05/16/2017	5/12/2017	5/31/2017	0.4609		0.4609		0.0611		—		—
8/17/2017	8/15/2017	8/31/2017	0.4609		0.4609		0.0611		—		—
11/15/2017	11/14/2017	11/30/2017	0.4609		0.4609		0.0611		—		—
Total 2017 Distributions			$	1.8436	$	1.8436	$	0.2444	$	—	$	—

The Company elected, effective for the 2013 tax year, to be treated as a REIT for federal income tax purposes. The Company's REIT election, assuming continued compliance with the applicable tests, will continue in effect for subsequent tax years. The Company satisfied the annual income test and the quarterly asset tests necessary for us to qualify to be taxed as a REIT for 2019, 2018 and 2017. Distributions made during 2017 were treated as qualifying dividend income related to taxable dividends received from the Company's TRSs that were received and distributed in the same year.