Our provision for (benefit from) income taxes for the years ended
December 31, 2017,
2016
and
2015
consisted of the following:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (Dollars in thousands) | |
| Current tax provision (benefit) | | | | | | | | | | | | |
| Federal | | $ | 41,737 | | | $ | 32,102 | | | $ | 2,549 | |
| State | | | 1,374 | | | | 323 | | | | (249 | ) |
| Total current | | | 43,111 | | | | 32,425 | | | | 2,300 | |
| | | | | | | | | | | | | |
| Deferred tax provision: | | | | | | | | | | | | |
| Federal | | | 37,398 | | | | 10,960 | | | | 30,268 | |
| State | | | 7,388 | | | | 5,185 | | | | 3,065 | |
| Total deferred | | | 44,786 | | | | 16,145 | | | | 33,333 | |
| Provision for income taxes | | $ | 87,897 | | | $ | 48,570 | | | $ | 3 | |
The provision for (benefit from) income taxes differs from the amount that would be computed by applying the statutory federal income tax rate of
35%
to income before income taxes as a result of the following:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (Dollars in thousands) | |
| Tax expense computed at federal statutory rate | | $ | 80,406 | | | $ | 53,123 | | | $ | 35,498 | |
| State income tax expense, net of federal benefit | | | 6,432 | | | | 4,553 | | | | 3,043 | |
| Other permanent differences | | | (748 | ) | | | (647 | ) | | | (935 | ) |
| Domestic manufacturing deduction | | | (5,387 | ) | | | (5,563 | ) | | | (39 | ) |
| Expiration of state net operating loss | | | - | | | | - | | | | 336 | |
| Tax expense (benefit) related to an increase (decrease) in unrecognized tax benefits | | | 75 | | | | 75 | | | | (479 | ) |
| Expiration of stock-based compensation | | | 2,832 | | | | - | | | | - | |
| Federal energy credits | | | - | | | | (3,428 | ) | | | (1,058 | ) |
| Rate changes | | | 10,018 | | | | - | | | | 48 | |
| Change in valuation allowance | | | (8,978 | ) | | | 253 | | | | (549 | ) |
| Other | | | 3,247 | | | | 204 | | | | (232 | ) |
| Provision for income taxes | | $ | 87,897 | | | $ | 48,570 | | | $ | 35,633 | |
| | | | | | | | | | | | | |
| Effective tax (benefit) rate | | | 38.3 | % | | | 32.0 | % | | | 35.1 | % |
On
December 22, 2017,
the Tax Cuts and Jobs Act (the “
Act”) was enacted, reducing the U.S. federal corporate income tax rate from
35%
to
21%,
among other changes. The SEC staff issued Staff Accounting Bulletin
118,
which provides guidance on accounting for the tax effects of the Act for which the accounting under ASC
740,
Income Taxes
(“ASC
740”
) is incomplete. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC
740
on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Act.
As of
December 31, 2017,
we have completed the majority of our accounting for the tax effects of the Act. However, as there is some uncertainty around the grandfathering provisions related to performance-based executive compensation, we have estimated a
provisional amount for deferred tax assets related to performance-based executive compensation. In addition, we also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The year-over-year increase in our effective tax rate from
2016
to
2017
was primarily the result of (
1
) the revaluation of the net carrying value of deferred tax assets as a result of the Act by
$10.0
million, (
2
) our effective tax rate in
2016
including
a benefit from energy credits which was
not
included in
2017
because the credit expired after
December 31, 2016
and (
3
) the expiration of stock-based compensation awards which were recognized through the income tax provision in
2017
in accordance with ASU
2016
-
09
,
as opposed to additional paid-in capital in
2016.
The increases were partially offset by the release of a valuation allowance related to our metropolitan district bond securities that were sold in
2017.
The year-over-year improvement in our effective tax rate from
2015
to
2016
was primarily the result of (
1
) a domestic manufacturing deduction,
whereas we were
not
eligible to take this deduction in the prior year due to our utilization of remaining federal net operating loss carryforwards to offset taxable income
, and (
2
) a higher estimated percentage of our homes delivered qualifying for energy credits.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows:
| | | December 31, | |
| | | 2017 | | | 2016 | |
| | | (Dollars in thousands) | |
| Deferred tax assets: | | | | | | | | |
| State net operating loss carryforwards | | $ | 25,398 | | | $ | 26,015 | |
| Alternative minimum tax and other tax credit carryforwards | | | - | | | | 12,325 | |
| Stock-based compensation expense | | | 10,280 | | | | 18,228 | |
| Warranty, litigation and other reserves | | | 10,763 | | | | 14,155 | |
| Receivables from related party | | | - | | | | 7,626 | |
| Accrued compensation | | | 699 | | | | 7,330 | |
| Asset impairment charges | | | 3,738 | | | | 6,456 | |
| Inventory, additional costs capitalized for tax purposes | | | 4,260 | | | | 6,498 | |
| Other, net | | | 1,887 | | | | 2,993 | |
| Total deferred tax assets | | | 57,025 | | | | 101,626 | |
| Valuation allowance | | | (8,170 | ) | | | (13,803 | ) |
| Total deferred tax assets, net of valuation allowance | | | 48,855 | | | | 87,823 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Property, equipment and other assets | | | 3,705 | | | | 4,276 | |
| Deferred revenue | | | - | | | | 1,400 | |
| Unrealized gain on marketable securities | | | 1,290 | | | | 4,676 | |
| Other, net | | | 2,380 | | | | 2,583 | |
| Total deferred tax liabilities | | | 7,375 | | | | 12,935 | |
| Net deferred tax asset | | $ | 41,480 | | | $ | 74,888 | |
As a result of the Act, we have re-measured the applicable deferred tax assets and liabilities at
December 31, 2017
based on the rates at which they are expected to reverse.
At
December 31, 2017,
we had
no
federal net operating loss or alternative minimum tax carryforwards. However, we had
million in tax-effected state net operating loss carryforwards. The state operating loss carryforwards, if unused, will begin to expire in
2019.
At
December 31, 2017
we had a valuation allowance of
$8.2
million, a decrease of
$5.6
million from the prior year. The remaining valuation allowance is related to various state net operating loss carryforwards where realization is more uncertain at this time due to the more limited carryforward periods that exist in certain states. The decline in our valuation allowance in
2017
is the result of the Company being able to utilize certain deferred tax assets, primarily related to our Metro Bonds, over which we previously had a significant valuation allowance.
At
December 31, 2017
and
2016,
our total liability for uncertain tax positi
ons was
$0.5
million and
$0.4
million, respectively, which has been offset against our state net operating loss carryforward deferred tax asset. The following table summarizes activity for the gross unrecognized tax benefit component of our total liability for uncertain tax positions for the years ended
December 31, 2017,
2016
and
2015:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (Dollars in thousands) | |
| Gross unrecognized tax benefits at beginning of year | | $ | 577 | | | $ | 488 | | | $ | 905 | |
| Increases related to prior year tax positions | | | 94 | | | | 156 | | | | 139 | |
| Decreases related to prior year tax positions | | | - | | | | - | | | | (475 | ) |
L apse of applicable statute of limitations | | | (124 | ) | | | (67 | ) | | | (81 | ) |
| Gross unrecognized tax benefits at end of year | | $ | 547 | | | $ | 577 | | | $ | 488 | |
Our liability for gross unrecognized tax benefits was
$0.5
million and
$0.6
million at
December 31, 2017
and
2016,
respectively, all of which, if recognized, would reduce our effective tax rate.
The net expense for interest and penalties reflected in the consolidated statements of operations and comprehensive income for the years ended
December 31, 2017,
2016
and
2015
was
$0.0
million,
$0.3
million and
$0.0
million, respectively
.
We have taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits
may
decrease
within the next
twelve
months. The possible decrease could result from the expiration of various statutes of limitation and the finalization of various state income tax matters. The estimated range of the reasonably possible decrease is
$0.0
million to
$0.1
million.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are subject to U.S. federal income tax examination for calendar tax years ending
2014
through
2017.
Additionally, we are
subject to various state income tax examinations for the
2013
through
2017
calendar tax years.