NVR INC

Income Taxes

During 2017, the Company's provision for income taxes and effective tax rate were impacted by the following items:


•	The enactment of the Tax Cuts and Jobs Act in December 2017 required a remeasurement of the Company's net deferred tax assets and resulted in additional income tax expense of $62,702.


•	The Company's January 1, 2017 adoption of ASU 2016-09 (see Note 1) resulted in the Company recognizing a current income tax benefit of $58,681 related to excess tax benefits from equity-based compensation in 2017.

The provision for income taxes consists of the following:



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	211,641		$	209,454		$	180,895
State	37,006			38,095			36,142
Deferred:
Federal	60,785			(9,230		)	2,681
State	(42		)	(1,884		)	567
	$	309,390		$	236,435		$	220,285

In addition to amounts applicable to income before taxes, the following income tax benefits were recorded in shareholders’ equity:



	Year Ended December 31,
	2017		2016		2015
Income tax benefits arising from compensation expense for tax purposes in excess of amounts recognized for financial statement purposes (1)	$	—	$	13,661	$	23,311

(1) During 2017, these income tax benefits were recognized in the consolidated statement of income as required under ASU 2016-09.

Deferred income taxes on NVR’s consolidated balance sheets were comprised of the following:



	December 31,
	2017		2016
Deferred tax assets:
Other accrued expenses and contract land deposit reserve	$	49,063	$	76,498
Deferred compensation	4,743		7,075
Equity-based compensation expense	36,799		55,077
Inventory	9,393		13,514
Unrecognized tax benefit	14,351		23,954
Other	9,681		10,106
Total deferred tax assets	124,030		186,224
Less: Deferred tax liabilities	4,511		5,414
Net deferred tax asset	$	119,519	$	180,810

Deferred tax assets arise principally as a result of various accruals required for financial reporting purposes and equity-based compensation expense, which are not currently deductible for tax return purposes. The decrease to the Company's deferred tax assets in 2017 was primarily attributable to the remeasurement as a result of the enactment of the Tax Cut and Jobs Act in December 2017.

Management believes that the Company will have sufficient future taxable income to make it more likely than not that the net deferred tax assets will be realized. Federal taxable income is estimated to be approximately $614,562 for the year ended December 31, 2017, and was $578,882 for the year ended December 31, 2016.

A reconciliation of income tax expense in the accompanying consolidated statements of income to the amount computed by applying the statutory federal income tax rate of 35% to income before taxes is as follows:



	Year Ended December 31,
	2017			2016			2015
Income taxes computed at the federal statutory rate	$	296,419		$	231,595		$	211,124
State income taxes, net of federal income tax benefit (1)	30,046			23,738			23,919
Excess tax benefits from equity-based compensation	(58,681		)	—			—
Remeasurement of net deferred tax assets due to enactment of Tax Cut and Jobs Act	62,702			—			—
Other, net (2)	(21,096		)	(18,898		)	(14,758		)
	$	309,390		$	236,435		$	220,285


(1)	Excludes state excess tax benefits from equity-based compensation included in the line below.


(2)	Primarily attributable to tax benefits from the domestic production activities deduction.

The Company’s effective tax rate in 2017, 2016 and 2015 was 36.53%, 35.73% and 36.52%, respectively. As previously discussed, the 2017 effective tax rate was impacted by the enactment of the Tax Cut and Jobs Act and the Company's adoption of ASU 2016-09.

The Company files a consolidated U.S. federal income tax return, as well as state and local tax returns in all jurisdictions where the Company maintains operations. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2014.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Year Ended December 31,
	2017			2016
Balance at beginning of year	$	46,110		$	46,591
Additions based on tax positions related to the current year	4,793			4,440
Reductions for tax positions of prior years	(5,566		)	(4,921		)
Settlements	—			—
Balance at end of year	$	45,337		$	46,110

If recognized, the total amount of unrecognized tax benefits that would affect the effective tax rate (net of the federal tax benefit) is $35,816 as of December 31, 2017.

The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2017 and 2016, the Company recognized a net reversal of accrued interest on unrecognized tax benefits in the amount of $1,065 and $1,582, respectively. For the year ended December 31, 2015, the Company recognized a net addition of accrued interest on unrecognized tax benefits in the amount of $125. As of December 31, 2017 and 2016, the Company had a total of $18,575 and $19,639, respectively, of accrued interest on unrecognized tax benefits which are included in “Accrued expenses and other liabilities” on the accompanying consolidated balance sheets. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of these authorities to not seek penalties from the Company for the tax positions it has taken on its returns, related to its unrecognized tax benefits. Therefore, the Company does not accrue penalties for the positions in which it has an unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as a component of income tax expense.

The Company believes that within the next 12 months, it is reasonably possible that the unrecognized tax benefits as of December 31, 2017 will be reduced by approximately $11,971 due to statute expiration and effectively settled positions in various state jurisdictions. The Company is currently under audit by the states of New Jersey and North Carolina.