Income Taxes
The provision for income tax attributable to income before income taxes consisted of (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | |
| | | | |
|
Federal | $ | 95,814 |
| | $ | 90,387 |
| | $ | 91,343 |
|
State | 8,961 |
| | 8,744 |
| | 6,715 |
|
Total current taxes | 104,775 |
| | 99,131 |
| | 98,058 |
|
Deferred: | |
| | |
| | |
|
Federal | 37,151 |
| | 5,749 |
| | 8,296 |
|
State | 10,341 |
| | 1,214 |
| | 5,725 |
|
Total deferred taxes | 47,492 |
| | 6,963 |
| | 14,021 |
|
Total income tax expense | $ | 152,267 |
| | $ | 106,094 |
| | $ | 112,079 |
|
The Company’s provision for income taxes was different from the amount computed by applying the statutory federal income tax rate of 35% to the underlying income before income taxes as a result of the following (in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Taxes at the U.S. federal statutory rate | $ | 118,936 |
| | $ | 105,779 |
| | $ | 111,846 |
|
State income taxes, net of federal tax impact | 10,712 |
| | 9,539 |
| | 9,627 |
|
Domestic production activities deduction | (7,108 | ) | | (5,037 | ) | | (5,566 | ) |
Non-deductible transaction costs | 541 |
| | 305 |
| | — |
|
Change in valuation allowance | 3,256 |
| | (4,038 | ) | | (1,872 | ) |
Tax Cuts and Jobs Act | 21,961 |
| | — |
| | — |
|
Other, net | 3,969 |
| | (454 | ) | | (1,956 | ) |
Total income tax expense | $ | 152,267 |
| | $ | 106,094 |
| | $ | 112,079 |
|
Effective income tax rate | 44.8 | % | | 35.1 | % | | 35.1 | % |
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis, and for operating loss and tax credit carryforwards. Deferred taxes consisted of the following at December 31, 2017 and 2016 (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
|
Impairment and other valuation reserves | $ | 40,438 |
| | $ | 73,890 |
|
Incentive compensation | 5,851 |
| | 8,322 |
|
Indirect costs capitalized | 19,574 |
| | 25,377 |
|
Net operating loss carryforwards (state) | 25,172 |
| | 24,583 |
|
State taxes | 2,181 |
| | 2,985 |
|
Other costs and expenses | 11,354 |
| | 15,214 |
|
Gross deferred tax assets | 104,570 |
| | 150,371 |
|
Valuation allowance | (3,478 | ) | | (323 | ) |
Deferred tax assets, net of valuation allowance | 101,092 |
| | 150,048 |
|
Deferred tax liabilities: | | | |
Interest capitalized | (7,144 | ) | | (814 | ) |
Basis difference in inventory | (9,207 | ) | | (14,186 | ) |
Fixed assets | (1,710 | ) | | (1,101 | ) |
Intangibles | (5,360 | ) | | (8,456 | ) |
Deferred financing costs | (898 | ) | | (924 | ) |
Other | (360 | ) | | (1,344 | ) |
Deferred tax liabilities | (24,679 | ) | | (26,825 | ) |
Net deferred tax assets | $ | 76,413 |
| | $ | 123,223 |
|
On December 22, 2017, the Tax Cuts and Jobs 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 Tax Cuts and Jobs Act, for which the accounting under ASC 740 is incomplete. To the extent that a company's accounting for certain income tax effects of the Tax Cuts and Jobs 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 Tax Cuts and Jobs Act.
As of December 31, 2017, we have completed the majority of our accounting for the tax effects of the Tax Cuts and Jobs Act. However, there is some uncertainty around the grandfathering provisions 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 Tax Cuts and Jobs Act and state conformity to those provisions and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As of December 31, 2017, the Company recorded an income tax charge of $22.0 million related to the re-measurement of our deferred tax assets related to the Tax Cuts and Jobs Act.
The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates for the years in which taxes are expected to be paid or recovered. Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable. Our assessment considers, among other things, the nature, frequency and severity of our current and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods and tax planning alternatives.
As of December 31, 2017, the Company had a state net operating loss carryforward of $385.9 million, which will expire between 2028 and 2036. As of December 31, 2017 and 2016, we had a valuation allowance on our deferred tax assets of $3.5 million and $323,000, respectively. The increase in our valuation allowance in 2017 was related to the $13.2 million impairment of our investment in a limited liability company joint venture for the entitlement and development of land located in a Los Angeles County, California that was recorded in the fourth quarter of 2017. A valuation allowance was recorded against the deferred tax asset related to this impairment due to the fact that the joint venture if disposed at its carrying value would result in a capital loss, the realization of which is uncertain. The decrease in the valuation allowance in 2016 was principally due to a release of the valuation allowance against the deferred tax asset related to state net operating loss carryovers as realization of tax benefits are more likely than not to occur.
The Company will continue to evaluate both positive and negative evidence in determining the need for a valuation allowance against its deferred tax assets. Changes in positive and negative evidence, including differences between the Company’s future operating results and the estimates utilized in the determination of the valuation allowance, could result in changes in the Company’s estimate of the valuation allowance against its deferred tax assets. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company’s consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation allowance against the Company’s deferred tax assets.
Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have taken on previously filed tax returns are not sustained. These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained, such as federal deduction that could be realized if an unrecognized state deduction was not sustained.
The Company files income tax returns in the U.S., including federal and multiple state and local jurisdictions. The Company’s tax years 2014-2016 will remain open to examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss or credit carryforwards.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Balance at beginning of year | $ | — |
| | $ | 272 |
|
Increase (decrease) related to prior year tax positions | 1,521 |
| | (272 | ) |
Balance at end of year | $ | 1,521 |
| | $ | — |
|
The Company classifies interest and penalties related to income taxes as part of income tax expense. The Company has not recorded any tax expense for interest and penalties on uncertain tax positions during the years ended December 31, 2017, 2016 and 2015. The Company estimates that the uncertain tax positions, if reversed, would result in a tax benefit of approximately $1.4 million.