Entity information:
Income Taxes
The components of income tax expense (benefit) for the years ended December, 31 2017, 2016 and 2015 are as follows:
(in thousands)
 
2017
 
2016
 
2015
Current
 
 
 
 
 
 
Federal
 
$
20,215

 
$
16,713

 
$
(4,202
)
State
 
1,869

 
1,124

 
405

 
 
22,084

 
17,837

 
(3,797
)
Deferred
 
 
 
 
 
 
Federal
 
1,797

 
(3,049
)
 
(4,176
)
State
 
521

 
(522
)
 
(1,716
)
 
 
2,318

 
(3,571
)
 
(5,892
)
 
 
$
24,402

 
$
14,266

 
$
(9,689
)

A reconciliation of differences between the statutory U.S. federal income tax rate of 35% and the Company’s effective tax rate from continuing operations for the years ended December 31, 2017, 2016 and 2015 follows:
 
 
2017
 
2016
 
2015
Federal statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State taxes, net of federal tax
 
2.9

 
2.7

 
1.7

Nondeductible capitalized transaction costs
 
0.2

 
1.4

 
(16.2
)
Nondeductible compensation expense
 
0.2

 
0.5

 
—

Nondeductible (permanent) items
 
0.9

 
1.0

 
(3.0
)
IRC Section 199 manufacturing deduction
 
(2.5
)
 
(3.5
)
 
—

Changes in tax rates, including 2017 Tax Act
 
(4.4
)
 
1.6

 
(6.2
)
Changes related to IRC section 382 limitations
 
—

 
(3.9
)
 
55.5

Excess windfall benefit of stock compensation
 
(2.3
)
 
(3.7
)
 
—

Other items
 
(0.2
)
 
0.5

 
(0.1
)
Effective tax rate
 
29.8
 %
 
31.6
 %
 
66.7
 %


For the year ended December 31, 2017, the Company recognized $24.4 million of income tax expense, which included an income tax benefit of $3.6 million related to a reduction of the Company's net deferred tax liability due to the lowering of the U.S. corporate income tax rate to 21% from 35% within the Tax Cuts and Jobs Act of 2017 ("2017 Tax Act"), which was enacted on December 22, 2017. This legislation significantly changes U.S. tax law effective January 1, 2018 by, among other things, lowering corporate income tax rates, eliminating Internal Revenue Code ("IRC") Section 199 manufacturing deduction, accelerating tax depreciation on certain acquired assets, further limiting executive compensation, and creating certain interest deduction limitations. The Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company has recognized the net tax benefit of $3.6 million related to the impact of the 2017 Tax Act for the remeasurement of deferred tax assets and liabilities and included this amount in its consolidated financial statements for the year ended December 31, 2017, on a provisional basis based on information currently available. The 2017 Tax Act may be subject to technical amendments, as well as interpretations and implementing regulations by the Department of Treasury and Internal Revenue Service, any of which could increase or decrease one or more impacts of the legislation. As such, we may record additional provisional amounts or adjustments to provisional amounts during the measurement period ending no later than December 2018.

For the year ended December 31, 2017, the Company's effective tax rate was lower than the Company's federal and state statutory rates primarily due to the enactment of the 2017 Tax Act, an IRC section 199 manufacturing deduction, and excess windfall tax benefits of stock compensation deductions. The effective tax rate for 2017 was 29.8% and excluding the impacts of the 2017 Tax Act, the Company's effective income tax rate in 2017 would have been 34.2%.

For the year ended December 31, 2016, the Company recognized $14.3 million of income tax expense, which included an income tax benefit of $1.7 million as a result of the Company adopting a state tax position related to IRC section 382 limitations on a state net operating loss carry-forward. For the year ended December 31, 2016, the Company's effective tax rate, excluding the state tax position change, was lower than the Company’s federal and state statutory rates primarily due to excess windfall tax benefits of stock compensation deductions and an IRC section 199 manufacturing deduction.

For the year ended December 31, 2015, the Company recognized a $9.7 million income tax benefit, which included an income tax benefit of $8.1 million as a result of the Company adopting a tax position related to IRC section 382 limitations on its federal and state net operating loss carryforwards and other built-in losses. IRC section 382 imposes annual limitations on the utilization of net operating loss carry-forwards, other tax carry-forwards and certain built-in losses (collectively, “Tax Attributes”) upon an ownership change as defined under that section. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in the Company’s stock by more than 50 percentage points over a three year testing period. If the Company were to experience an IRC section 382 ownership change, an annual limitation could be imposed on certain Tax Attributes. Upon the Merger, the Company reviewed whether any of its Tax Attributes would be subject to IRC section 382 limitation and from such review, identified a tax position, which involves using a specific identification method, instead of the Company's previous ratable allocation method, to determine the amount of tax-deductible built-in losses subject to IRC section 382 limitations. As a result of adopting this tax position in the fourth quarter of 2015, the Company more likely than not expects to realize additional federal and state net operating loss carry-forwards that were previously limited under the prior method of determining IRC section 382 limitations against its Tax Attributes. The Company did not recognize any material unfavorable adjustments to its Tax Attributes specifically related to the change of control from the Merger on December 1, 2015. For the year ended December 31, 2015, the Company's effective tax rate, excluding the IRC section 382 tax position change, was lower than the Company's federal and state statutory rates primarily due to non-deductible merger-related transaction costs.

On December 1, 2015, BMHC and SBS completed the Merger. The Merger qualified as a tax-free reorganization within the meaning of IRC section 368(a), and therefore, the Company assumed the carryover tax basis of the acquired assets and liabilities of SBS. As a result, the Company recorded a net deferred tax liability of $75.0 million and a tax payable of $3.2 million impacting goodwill as part of purchase accounting. None of the goodwill recognized as part of this transaction is deductible for income tax purposes.

On May 1, 2015, BMHC completed its stock acquisition of VNS. The Company assumed the carryover tax basis of the acquired assets and liabilities of VNS. As a result, the Company recorded a net deferred tax liability of $4.4 million and a tax receivable of $0.4 million impacting goodwill as part of purchase accounting. None of the goodwill recognized as part of this transaction is deductible for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, 2017 and 2016:
(in thousands)
 
2017
 
2016
Deferred tax assets related to:
 
 
 
 
Accounts receivable
 
$
2,061

 
$
2,951

Inventory
 
1,931

 
2,857

Accrued compensation
 
2,981

 
6,044

Insurance reserves
 
10,778

 
17,126

Stock-based compensation
 
2,388

 
3,210

Restructuring reserves
 
365

 
1,868

Other accrued liabilities
 
1,149

 
665

Federal net operating loss carryforward
 
17,372

 
30,664

State net operating loss carryforward
 
5,559

 
5,593

Other
 
1,633

 
2,398

 
 
46,217

 
73,376

Valuation allowance
 
(145
)
 
(125
)
    Total deferred tax assets
 
46,072

 
73,251

 
 
 
 
 
Deferred tax liabilities related to:
 
 
 
 
Goodwill and intangibles
 
(21,030
)
 
(31,808
)
Property and equipment
 
(25,440
)
 
(38,836
)
Other assets
 
(1,370
)
 
(2,057
)
    Total deferred tax liabilities
 
(47,840
)
 
(72,701
)
    Net deferred tax (liability) asset
 
$
(1,768
)
 
$
550


At December 31, 2017, due to IRC section 382 limitations, the Company estimates federal net operating loss carryforwards generated prior to November 2011 will be limited to approximately $4.8 million per year through 2034. These net operating losses may generally be carried forward 20 years. As a result, federal operating losses if unused will expire as follows:

•
$34.2 million in 2028;
•
$17.3 million in 2029; and
•
$31.2 million in years 2030 through 2034.

In addition, at December 31, 2017, the Company had $108.5 million of state net operating loss carryforwards that expire at various dates commencing in 2017 through 2032.

During the first quarter of 2016, the Company elected to early adopt ASU 2016-09 and has prospectively recognized tax benefits of $1.9 million and $1.7 million during 2017 and 2016, respectively, from stock-based compensation deductions into its income tax expense. Deferred tax assets relating to tax benefits of stock-based compensation were reduced to reflect exercises or vesting; however, some exercises or vesting resulted in tax deductions in excess of previously recorded deferred tax benefits based on the value at the time of grant ("windfalls"). Prior to the adoption of ASU 2016-09, the Company had excluded excess windfall tax benefits resulting from stock-based compensation vesting and exercises as components of the Company’s gross deferred tax assets, as Tax Attributes related to such windfall tax benefits were not recognized until they resulted in a reduction of taxes payable. The tax effected amount of unrealized net operating loss carryforwards resulting from stock-based compensation awards vested and/or exercised was $0, $0 and $0.4 million at December 31, 2017, 2016 and 2015, respectively. When realized, these excess windfall tax benefits were credited to additional paid-in capital. Excess windfall tax benefits recognized as a component of shareholders' equity were $0, $0.4 million and $0 for December 31, 2017, 2016 and 2015, respectively. The Company had followed the "with-and-without" allocation approach to determine when such net operating loss carryforwards have been realized.

The Company recognized a current income tax receivable of $3.7 million and $2.4 million at December 31, 2017 and 2016, respectively. The Company paid federal and state income tax payments of $23.5 million and $8.8 million during 2017 and 2016, respectively. The Company received tax refunds of $0.6 million and $0.6 million in 2017 and 2016, respectively.

In accordance with ASC 740, the Company evaluates its deferred tax assets to determine if valuation allowances are required. In assessing the realizability of deferred tax assets, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of December 31, 2017 and 2016, the primary positive evidence considered to support the realization of the Company's deferred tax assets includes: (i) the cumulative pre-tax income over the last 36 months, (ii) the reversal of deferred tax liabilities related to depreciation and amortization that would occur within the same jurisdiction and during the carry forward period necessary to absorb the federal and state net operating losses and other deferred tax assets, (iii) current and prior year utilization of federal and state net operating losses, and (iv) no history of material expiring Tax Attributes. The primary negative evidence considered includes: (i) the Company's cumulative losses prior to 2013, (ii) unsettled circumstances associated with the general economy and housing market, as well as mortgage credit availability, and (iii) no federal and state net operating loss carryback opportunities. To the extent the Company generates future net operating losses, the Company may be required to increase the valuation allowance on its deferred tax assets and income tax benefit would be adversely affected.

Based upon the positive and negative evidence considered, the Company believes it is more likely than not that it will realize the benefit of the deferred tax assets, net of the existing state tax valuation allowances of $0.1 million and $0.1 million as of December 31, 2017 and 2016, respectively. To the extent the Company generates sufficient taxable income in the future to fully utilize the tax benefits of the net deferred tax assets on which a valuation allowance was recorded, the Company’s effective tax rate would be impacted as the valuation allowance is reversed. The Company continues to evaluate its deferred tax asset on a quarterly basis and notes that, if economic conditions were to change such that the Company earns less taxable income than the amounts required to fully utilize its deferred tax asset, a portion of the asset may expire unused.

The following table shows the changes in the amount of the Company’s valuation allowance:
(in thousands)
 
2017
 
2016
 
2015
Balance at January 1,
 
$
125

 
$
126

 
$
—

Additions charged to expense
 
20

 
—

 
—

     Additions charged to Goodwill/Purchase Accounting
 
—

 
—

 
126

Deductions - other
 
—

 
(1
)
 
—

Balance at December 31,
 
$
145

 
$
125

 
$
126



The Company has no material uncertain tax positions as of December 31, 2017 and December 31, 2016.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of the effect of interest and penalties) is as follows:
(in thousands)
 
2017
 
2016
Balance at January 1,
 
$
—

 
$
3,224

Tax positions taken in prior periods:
 
 
 
 
   Gross increases
 
—

 
—

   Gross decreases
 
—

 
(3,224
)
Tax positions taken in current period:
 
 
 
 
   Gross increases
 
—

 
—

Settlements with taxing authorities
 
—

 
—

Lapse of applicable statute of limitations
 
—

 
—

Balance at December 31,
 
$
—

 
$
—



The Company‘s state tax returns are open to examination for an average of three years. However, certain jurisdictions remain open to examination longer than three years due to the existence of net operating losses. The Company’s federal returns are open to examination for three years; however, due to statutory waivers, SBS' tax years ended July 31, 2008 and May 5, 2009 remain open until July 31, 2019 with the federal tax authorities. SBS is currently under examination by the IRS for its tax years ended July 31, 2008 and May 5, 2009. At December 31, 2017 and 2016, the amount recognized related to expected tax, penalties and interest payments as a result of the IRS audits in income taxes receivable on the consolidated balance sheets was immaterial.

The Company’s policy is to recognize interest and penalties related to income tax liabilities and unrecognized tax benefits in income tax expense. During the years ended December 31, 2017, 2016 and 2015, penalties and interest related to income tax liabilities and uncertain tax benefits were not material.