
	Three Months Ended August 31,						Nine Months Ended August 31,
	2021			2020			2021			2020
Income tax expense	$	24,100		$	22,900		$	80,900		$	47,800
Effective tax rate	13.8		%	22.6		%	17.2		%	20.1		%

Our income tax expense and effective tax rate for the three months ended August 31, 2021 included the favorable impact of $21.5 million of federal energy tax credits we earned from building energy-efficient homes, partially offset by $2.5 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). Our income tax expense and effective tax rate for the three months ended August 31, 2020 included the favorable impact of $3.1 million of federal energy tax credits we earned from building energy-efficient homes, partly offset by $1.2 million of non-deductible executive compensation expense.

Our income tax expense and effective tax rate for the nine months ended August 31, 2021 reflected the favorable impacts of $39.0 million of federal energy tax credits we earned from building energy-efficient homes and $3.9 million of excess tax benefits related to stock-based compensation, partially offset by $5.8 million of non-deductible executive compensation expense under Internal Revenue Code Section 162(m). For the nine months ended August 31, 2020, our income tax expense and effective tax rate included the favorable impacts of $10.1 million of federal energy tax credits we earned from building energy-efficient homes and $5.6 million of excess tax benefits related to stock-based compensation, partly offset by $3.2 million of non-deductible executive compensation expense.

The federal energy tax credits for the three months and nine months ended August 31, 2021 resulted from legislation enacted in December 2020 and earlier periods. The legislation enacted in December 2020, among other things, extended the availability of a business tax credit for building new energy-efficient homes through December 31, 2021. Prior to this legislation, the tax credit expired on December 31, 2020. This extension is expected to benefit our income tax provision in future periods.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to provide economic and other relief as a result of the 2019 coronavirus disease (“COVID-19”) pandemic. Among other things, the CARES Act accelerated the timetable for alternative minimum tax (“AMT”) credit refunds. As a result, in the 2020 second quarter, we filed a superseding 2019 federal income tax return claiming a refund of $39.3 million of AMT credits and reclassified this amount from deferred tax assets to receivables. We received this AMT credit refund in the 2021 first quarter.

The CARES Act also provided an Employee Retention Credit (“ERC”), which is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers could qualify for up to $5,000 of credit for each employee based on certain wages paid after March 12, 2020 and before January 1, 2021. Based on our evaluation of this provision and the significant pandemic-related impacts on our operations in 2020, we recognized an ERC of $4.3 million as an offset to payroll tax expenses within selling general and administrative expenses in our consolidated statements of operations upon filing for the refund in the 2021 first quarter.

In June 2020, California enacted tax legislation that approved the suspension of California net operating loss deductions for tax years 2020, 2021 and 2022. The suspension of California net operating loss deductions did not have an impact on our income tax expense for the three months or nine months ended August 31, 2021.

Deferred Tax Asset Valuation Allowance. We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible. The value of our deferred tax assets depends on applicable income tax rates.

Our deferred tax assets of $213.1 million as of August 31, 2021 and $249.1 million as of November 30, 2020 were partly offset by valuation allowances of $18.3 million and $18.0 million, respectively. The deferred tax asset valuation allowances as of August 31, 2021 and November 30, 2020 were primarily related to certain state net operating losses that

had not met the “more likely than not” realization standard at those dates. As a result of an adjustment to our state net operating losses, we increased the valuation allowance by $.3 million in the 2021 third quarter. Based on the evaluation of our deferred tax assets as of August 31, 2021, we determined that most of our deferred tax assets would be realized. Therefore, other than the slight increase mentioned above, no adjustments to our deferred tax valuation allowance were needed for the nine months ended August 31, 2021.

We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. The accounting for deferred tax assets is based upon estimates of future results. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing federal and state tax laws and corporate income tax rates could also affect actual tax results and the realization of deferred tax assets over time.