Income Taxes

12 Months Ended

Sep. 30, 2023

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,
	2023		2022		2021
	(In millions)
Current tax expense:
Federal	$	1,293.0	$	1,448.9	$	978.1
State	272.4		256.1		197.0
	1,565.4		1,705.0		1,175.1
Deferred tax expense (benefit):
Federal	(39.0)		21.2		(12.7)
State	(6.9)		7.9		2.7
	(45.9)		29.1		(10.0)
Total income tax expense	$	1,519.5	$	1,734.1	$	1,165.1

The Company’s effective tax rate was 24.1%, 22.7% and 21.8% in fiscal 2023, 2022 and 2021, respectively. The effective tax rates for all years include an expense for state income taxes and tax benefits related to stock-based compensation and federal energy efficient homes tax credits.

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,
	2023		2022		2021
	(In millions)
Income taxes at federal statutory rate	$	1,326.1	$	1,602.2	$	1,124.8
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit	208.1		210.0		166.9
Valuation allowance	(3.1)		(2.1)		(3.3)
Tax credits	(44.4)		(100.8)		(116.3)
Excess tax benefit from stock-based compensation	(25.6)		(20.1)		(38.4)
Tax contingencies	(1.5)		—		(6.0)
Other	59.9		44.9		37.4
Total income tax expense	$	1,519.5	$	1,734.1	$	1,165.1

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,
	2023		2022
	(In millions)
Deferred tax assets:
Inventory costs	$	67.8	$	74.0
Inventory impairments	5.8		9.5
Warranty and construction defect costs	281.2		239.5
Net operating loss carryforwards	42.2		44.1
Tax credit carryforwards	6.8		6.4
Incentive compensation plans	88.0		84.7
Other	7.0		12.7
Total deferred tax assets	498.8		470.9
Valuation allowance	(14.8)		(17.9)
Total deferred tax assets, net of valuation allowance	484.0		453.0
Deferred tax liabilities:
Deferral of profit on home closings	163.6		209.4
Depreciation of fixed assets	46.3		30.5
Deferral of income	23.4		18.5
Undistributed earnings of subsidiary	51.7		27.3
Other	11.8		26.2
Total deferred tax liabilities	296.8		311.9
Deferred income taxes, net	$	187.2	$	141.1

The Company has $29.3 million of tax benefits for a federal net operating loss (NOL) carryforward. The utilization of the federal NOL is subject to IRC Section 382 limitations; however, it is expected that all of the federal NOL will be utilized within the carryforward period. D.R. Horton has $11.9 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction. Of this amount, $4.5 million of the tax benefits expire over the next ten years and the remaining $7.4 million expire from fiscal years 2034 to 2043. Forestar has $1.0 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 $14.8 million and $17.9 million at September 30, 2023 and 2022, respectively, related to deferred tax assets for state NOL, state capital loss and tax credit carryforwards that are expected 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 and tax credit 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 2023 and 2022 is as follows:

	Year Ended September 30,
	2023		2022
	(In millions)
Unrecognized tax benefits, beginning of year	$	2.9	$	2.9
Additions for tax positions taken in the current or prior years	—		—
Settlements	(1.5)		—
Unrecognized tax benefits, end of year	$	1.4	$	2.9

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $1.4 million and $2.9 million in fiscal 2023 and 2022, respectively. The Company had no accrued interest or penalties related to unrecognized tax benefits in fiscal 2023 or 2022. 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 2019 through 2023. Fiscal year 2019 is open with respect to a federal refund claim related to additional energy efficient tax credits. This refund claim 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 federal income tax remains open for examination for tax years 2020 through 2023. The statute of limitations for Forestar’s major state tax jurisdictions generally remains open for examination for tax years 2018 through 2023. Forestar is not currently under audit for federal or state income taxes.