Note 15 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

15. Income Taxes

Our provision for (benefit from) income taxes for the years ended December 31, 2019, 2018 and 2017 consisted of the following:

	Year Ended December 31,
	2019		2018			2017
	(Dollars in thousands)
Current tax provision:
Federal	$	50,870	$	47,547		$	41,737
State		2,137		1,798			1,374
Total current		53,007		49,345			43,111
Deferred tax provision:
Federal		5,175		(2,755	)		37,398
State		8,495		6,484			7,388
Total deferred		13,670		3,729			44,786
Provision for income taxes	$	66,677	$	53,074		$	87,897

The provision for (benefit from) income taxes differs from the amount that would be computed by applying the statutory federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 to income before income taxes as a result of the following:

	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Tax expense computed at federal statutory rate	$	64,048		$	55,409		$	80,406
State income tax expense, net of federal benefit		9,810			9,661			6,432
Other permanent differences		265			(31	)		(748	)
Domestic manufacturing deduction		-			-			(5,387	)
Limitation on executive compensation		4,463			2,912			-
Rate change effect of tax method changes		-			(5,661	)		-
Tax expense (benefit) related to an increase (decrease) in unrecognized tax benefits		(1,571	)		4,680			75
Stock based compensation (windfall)/shortfall		(2,828	)		415			2,832
Federal energy credits		(7,649	)		(12,446	)		-
Rate changes		190			(78	)		10,018
Change in valuation allowance		121			(885	)		(8,978	)
Other		(172	)		(902	)		3,247
Provision for income taxes	$	66,677		$	53,074		$	87,897
Effective tax rate		21.9	%		20.1	%		38.3	%

The year-over-year change in our effective tax rate from 2018 to 2019 was impacted by the following items:

(1) Our effective tax rate in 2019 includes a $2.8 million benefit from share based awards vested or exercised during the year compared to a $0.4 million expense during the prior year.

(2) Our effective tax rate in 2019 includes a $1.6 million benefit due to a decrease in our liability for uncertain tax positions, while our effective tax rate in 2018 included a $4.7 million expense due to an increase in our liability for uncertain tax positions.

(3) Our effective tax rate in 2018 included a larger benefit from energy tax credits than 2019.

(4) Our effective tax rate in 2018 included the benefit of certain tax method changes that were implemented with the filing of our 2017 Federal tax return.

The year-over-year change in our effective tax rate from 2017 to 2018 was impacted by the following items:

(1) The net impact from the enactment of the Tax Cuts and Jobs Act, which reduced the Federal corporate tax rate from 35% to 21% but also reduced the deductibility of certain executive based compensation and eliminated the domestic manufacturing deduction beginning in 2018 and resulted in a $10.0 million adjustment in the fourth quarter of 2017 to reduce the carrying value of our net deferred tax assets due to the reduction in the Federal tax rate.

(2) Our effective tax rate in 2018 included a benefit from energy tax credits, the majority of which relate to homes closed during 2017, which were not included in our 2017 effective tax rate because the credit was retroactively extended after December 31, 2017.

(3) Our effective tax rate in 2018 included the benefit of certain tax method changes that were implemented with the filing of our 2017 Federal tax return.

(4) Our effective tax rate in 2018 included an increase in our liability for uncertain tax positions.

(5) Our effective tax rate in 2017 included the release of a valuation allowance related to our metropolitan district bond securities that were sold in 2017.

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,
	2019			2018
	(Dollars in thousands)
Deferred tax assets:
State net operating loss carryforwards	$	10,123		$	18,045
Stock-based compensation expense		10,493			11,767
Warranty, litigation and other reserves		12,784			12,844
Accrued compensation		2,592			2,622
Asset impairment charges		3,526			5,848
Inventory, additional costs capitalized for tax purposes		7,228			5,863
Other, net		910			1,680
Total deferred tax assets		47,656			58,669
Valuation allowance		(6,498	)		(7,598	)
Total deferred tax assets, net of valuation allowance		41,158			51,071
Deferred tax liabilities:
Property, equipment and other assets		9,551			8,440
Deferral of profit on home sales		3,359			1,817
Unrealized gain on marketable securities		2,716			375
Other, net		3,764			3,261
Total deferred tax liabilities		19,390			13,893
Net deferred tax asset	$	21,768		$	37,178

At December 31, 2019, we had no federal net operating loss or alternative minimum tax carryforwards. However, we had $10.1 million in tax-effected state net operating loss carryforwards. The state operating loss carryforwards, if unused, will begin to expire in 2020.

At December 31, 2019 we had a valuation allowance of $6.5 million, a decrease of $1.1 million from the prior year. The valuation allowance is related to various state net operating loss carryforwards where realization is uncertain at this time due to the limited carryforward periods coupled with minimal activity that exists in certain states.

At December 31, 2019 and 2018, our total liability for uncertain tax positions was $8.9 million and $10.4 million, respectively, a portion of 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, 2019, 2018 and 2017:

	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Gross unrecognized tax benefits at beginning of year	$	8,579		$	547		$	577
Increases related to prior year tax positions		75			8,190			94
Decreases related to prior year tax positions		-			-			-
Lapse of applicable statute of limitations		(139	)		(158	)		(124	)
Gross unrecognized tax benefits at end of year	$	8,515		$	8,579		$	547

At December 31, 2019 and 2018, there was $3.3 million and $3.5 million, respectively, of unrecognized tax benefits that if recognized, would reduce our effective tax rate.

The net expense for interest and penalties for the years ended December 31, 2019, 2018 and 2017 was ($1.5) million, $1.9 million and $0.0 million, respectively, and are included in provision for income taxes in the consolidated statements of operations and comprehensive income.

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 $0.2 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 2016 through 2019. Additionally, we are subject to various state income tax examinations for the 2015 through 2019 calendar tax years.