Income Taxes

12 Months Ended

Sep. 30, 2019

INCOME TAXES

Income Tax Expense

The components of the Company’s income tax expense are as follows:



	Year Ended September 30,
	2019		2018		2017
	(In millions)
Current tax expense:
Federal	$	407.3	$	373.2	$	425.6
State	79.3		53.6		27.3
	486.6		426.8		452.9
Deferred tax expense:
Federal	13.9		158.7		87.9
State	6.2		12.2		22.9
	20.1		170.9		110.8
Total income tax expense	$	506.7	$	597.7	$	563.7

The Company’s effective tax rate was 23.8%, 29.0% and 35.2% in fiscal 2019, 2018 and 2017, respectively. The effective tax rates for fiscal 2019 and 2018 reflect the impact of the Tax Cuts and Jobs Act (Tax Act), which was enacted into law in December 2017. The Tax Act reduced the federal corporate tax rate from 35% to 21% for all corporations effective January 1, 2018. For fiscal year companies, the change in law required the application of a blended tax rate in the year of change, which for the Company was 24.5% for the fiscal year ended September 30, 2018. For the fiscal year ended September 30, 2019 and thereafter, the applicable statutory federal tax rate is 21%. The Tax Act also repealed the domestic production activities deduction effective for the Company beginning October 1, 2018. The effective tax rates for fiscal year 2019 and 2018 also include a tax benefit related to stock-based compensation.

The fiscal year 2018 effective tax rate also included the remeasurement of the Company’s deferred tax assets and liabilities as a result of the Tax Act, the release of a valuation allowance against deferred tax assets related to Forestar and the enactment of the Bipartisan Budget Act of 2018, which retroactively extended the expiration date of the federal energy efficient home credit from December 31, 2016 until December 31, 2017. The effective tax rates for all years include an expense for state income taxes.

Reconciliation of Expected Income Tax Expense

Differences between income tax expense and tax computed by applying the federal statutory rate of 21% in fiscal 2019, 24.5% in fiscal 2018 and 35% in fiscal 2017 to income before income taxes during each year is due to the following:



	Year Ended September 30,
	2019			2018			2017
	(In millions)
Income taxes at federal statutory rate	$	446.3		$	505.0		$	560.7
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit	69.1			59.4			42.3
Domestic production activities deduction	—			(36.7		)	(39.8		)
Valuation allowance	(0.2		)	(7.3		)	0.8
Tax credits	(1.6		)	(19.0		)	(3.5		)
Excess tax benefit from stock-based compensation	(16.1		)	(21.2		)	—
Tax law change from enactment of Tax Act	—			108.7			—
Other	9.2			8.8			3.2
Total income tax expense	$	506.7		$	597.7		$	563.7

Deferred Income Taxes

Deferred tax assets and liabilities reflect the tax consequences of temporary differences between the financial statement bases of assets and liabilities and their tax bases, tax losses and credit carryforwards. Components of deferred income taxes are summarized as follows:



	September 30,
	2019			2018
	(In millions)
Deferred tax assets:
Inventory costs	$	39.8		$	40.9
Inventory impairments	27.9			31.8
Warranty and construction defect costs	135.1			121.8
Net operating loss carryforwards	31.5			38.1
Tax credit carryforwards	3.5			4.3
Incentive compensation plans	65.1			55.2
Deferred income	0.2			1.3
Other	7.0			5.8
Total deferred tax assets	310.1			299.2
Valuation allowance	(18.7		)	(17.7		)
Total deferred tax assets, net of valuation allowance	$	291.4		$	281.5
Deferred tax liabilities:
Deferral of profit on home closings	95.4			64.9
Depreciation of fixed assets	14.2			10.7
Other	18.7			11.9
Total deferred tax liabilities	$	128.3		$	87.5
Deferred income taxes, net	$	163.1		$	194.0

D.R. Horton has $16.4 million of tax benefits for state net operating loss (NOL) carryforwards that expire at various times depending on the tax jurisdiction. Of the total amount, $6.2 million of the tax benefits expire over the next ten years and the remaining $10.2 million expires from fiscal years 2030 to 2039.

Forestar has $11.4 million of tax benefits for federal NOL carryforwards which have no expiration date. Additionally, Forestar has $3.7 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction.

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 of the Company’s deferred tax assets.

Valuation Allowance

The Company has a valuation allowance of $18.7 million at September 30, 2019 and $17.7 million at September 30, 2018 related to state deferred tax assets for NOL carryforwards that are more likely than not to expire before being realized. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to the remaining state NOL carryforwards. Any reversal of the valuation allowance in future periods will impact the Company’s effective tax rate.

Regulations and Legislation

D.R. Horton is subject to federal income tax and state income tax in multiple jurisdictions. The statute of limitations for D.R. Horton’s major tax jurisdictions remains open for examination for fiscal years 2016 through 2019. D.R. Horton is currently being audited by various states; however, to date, management is not aware of any significant findings identified by the taxing authorities.

Forestar is subject to federal income tax and state income tax in multiple jurisdictions. The federal statute of limitations for tax years prior to 2017 is effectively closed. The statute of limitations in major state jurisdictions for tax years prior to 2015 is closed. The Internal Revenue Service recently completed an audit of Forestar’s 2016 tax year with no changes. Forestar is not currently being audited by any state jurisdictions.