Income Taxes

12 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income Tax Expense

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

	Year Ended September 30,
	2021		2020		2019
	(In millions)
Current tax expense:
Federal	$	978.1	$	484.0	$	407.3
State	197.0		104.4		79.3
	1,175.1		588.4		486.6
Deferred tax expense (benefit):
Federal	(12.7)		20.0		13.9
State	2.7		(5.9)		6.2
	(10.0)		14.1		20.1
Total income tax expense	$	1,165.1	$	602.5	$	506.7

The Company’s effective tax rate was 21.8%, 20.2% and 23.8% in fiscal 2021, 2020 and 2019, respectively. The effective tax rates for all years include an expense for state income taxes and tax benefits related to stock-based compensation. The effective tax rates for fiscal 2021 and 2020 include a reduction of 2.2% and 3.1%, respectively, for tax benefits related to the federal energy efficient homes tax credit. The effective tax rate for fiscal 2020 also includes a reduction of 0.4% for a tax benefit related to the release of a valuation allowance against the Company’s state deferred tax assets.

Reconciliation of Expected Income Tax Expense

Differences between income tax expense and tax computed by applying the federal statutory rate of 21% to income before income taxes during each year is due to the following:

	Year Ended September 30,
	2021		2020		2019
	(In millions)
Income taxes at federal statutory rate	$	1,124.8	$	626.4	$	446.3
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit	166.9		79.1		69.1
Valuation allowance	(3.3)		(11.2)		(0.2)
Tax credits	(116.3)		(93.4)		(1.6)
Excess tax benefit from stock-based compensation	(38.4)		(22.3)		(16.1)
Tax contingencies	(6.0)		8.9		—
Other	37.4		15.0		9.2
Total income tax expense	$	1,165.1	$	602.5	$	506.7

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,
	2021		2020
	(In millions)
Deferred tax assets:
Inventory costs	$	63.5	$	37.6
Inventory impairments	12.7		21.5
Warranty and construction defect costs	190.5		156.7
Net operating loss carryforwards	11.7		17.5
Tax credit carryforwards	1.6		2.1
Incentive compensation plans	77.5		68.3
Other	15.6		15.6
Total deferred tax assets	373.1		319.3
Valuation allowance	(4.2)		(7.5)
Total deferred tax assets, net of valuation allowance	368.9		311.8
Deferred tax liabilities:
Deferral of profit on home closings	166.7		131.9
Depreciation of fixed assets	14.4		19.0
Other	32.5		16.0
Total deferred tax liabilities	213.6		166.9
Deferred income taxes, net	$	155.3	$	144.9

D.R. Horton has $10.3 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, $2.9 million of the tax benefits expire over the next ten years and the remaining $7.4 million expire from fiscal years 2032 to 2041. Forestar has $1.4 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 $4.2 million and $7.5 million at September 30, 2021 and 2020, respectively, 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.

Unrecognized Tax Benefits

Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return and the benefits recognized in the financial statements. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for fiscal 2021 and 2020 is as follows:

	Year Ended September 30,
	2021		2020
	(In millions)
Unrecognized tax benefits, beginning of year	$	8.9	$	—
Additions attributable to tax positions taken in the current year	1.5		8.9
Additions attributable to tax positions taken in prior years	—		—
Settlements	(7.5)		—
Unrecognized tax benefits, end of year	$	2.9	$	8.9

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $2.9 million. The Company had no accrued interest or penalties related to unrecognized tax benefits at September 30, 2021. The Company classifies interest expense and penalties on income taxes as income tax expense.

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 2018 through 2021. A federal refund claim related to the retroactive extension of energy efficient homes tax credits for fiscal 2018 is currently under audit by the Internal Revenue Service. D.R. Horton is under audit by various states, however, the Company is not aware of any significant findings by the state taxing authorities.

Forestar is subject to federal income tax and state income tax in multiple jurisdictions. The statute of limitations for Forestar’s major tax jurisdictions remains open for examination for tax years 2016 through 2021. Forestar is not currently under audit for federal or state income taxes.