Income Taxes

The provision for income taxes consists of the following:



	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	126,358		$	211,641		$	209,454
State	37,038			37,006			38,095
Deferred:
Federal	138			60,785			(9,230		)
State	(999		)	(42		)	(1,884		)
Income tax expense	$	162,535		$	309,390		$	236,435

Deferred income taxes on NVR’s consolidated balance sheets were comprised of the following:



	December 31,
	2018		2017
Deferred tax assets:
Other accrued expenses and contract land deposit reserve	$	51,316	$	49,063
Deferred compensation	4,693		4,743
Equity-based compensation expense	40,744		36,799
Inventory	9,242		9,393
Unrecognized tax benefit	13,587		14,351
Other	5,113		9,681
Total deferred tax assets	124,695		124,030
Less: Deferred tax liabilities	6,091		4,511
Net deferred tax asset	$	118,604	$	119,519

Deferred tax assets arise principally as a result of various accruals required for financial reporting purposes and equity-based compensation expense, which are not currently deductible for tax return purposes.

Management believes that the Company will have sufficient future taxable income to make it more likely than not that the net deferred tax assets will be realized. Federal taxable income is estimated to be approximately $636,849 for the year ended December 31, 2018, and was $621,587 for the year ended December 31, 2017.

A reconciliation of income taxes computed at the federal statutory rate (21% in 2018 and 35% in 2017 and 2016) to income tax expense is as follows:



	Year Ended December 31,
	2018			2017			2016
Income taxes computed at the federal statutory rate	$	201,544		$	296,419		$	231,595
State income taxes, net of federal income tax benefit (1)	42,944			30,046			23,738
Excess tax benefits from equity-based compensation (2)	(77,478		)	(58,681		)	—
Remeasurement of net deferred tax assets due to enactment of Tax Cut and Jobs Act (3)	(497		)	62,702			—
Other, net (4)	(3,978		)	(21,096		)	(18,898		)
Income tax expense	$	162,535		$	309,390		$	236,435


(1)	Excludes state excess tax benefits from equity-based compensation included in the line below.


(2)	ASU 2016-09 adopted January 1, 2017. Excess tax benefits related to equity-based compensation of $13,661 in 2016 were recorded to shareholders' equity.


(3)	The enactment of the Tax Cuts and Jobs Act in December 2017 required a remeasurement of the Company's net deferred tax assets and resulted in additional income tax expense of $62,702.

(4)

Primarily attributable to tax benefits from certain energy credits for the year ended December 31, 2018. For the years ended December 31, 2017 and 2016, this was primarily attributable to tax benefits from the domestic production activities deduction. The domestic production activities deduction was eliminated effective January 1, 2018, following the enactment of the Tax Cuts and Jobs Act in December 2017.

The Company’s effective tax rate in 2018, 2017 and 2016 was 16.94%, 36.53% and 35.73%, respectively.

The Company files a consolidated U.S. federal income tax return, as well as state and local tax returns in all jurisdictions where the Company maintains operations. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years prior to 2015.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Year Ended December 31,
	2018			2017
Balance at beginning of year	$	45,337		$	46,110
Additions based on tax positions related to the current year	4,340			4,793
Reductions for tax positions of prior years	(6,259		)	(5,566		)
Settlements	—			—
Balance at end of year	$	43,418		$	45,337

If recognized, the total amount of unrecognized tax benefits that would affect the effective tax rate (net of the federal tax benefit) is $34,300 as of December 31, 2018.

The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2018, 2017, and 2016, the Company recognized a net reversal of accrued interest on unrecognized tax benefits in the amount of $1,384, $1,065 and $1,582, respectively. As of December 31, 2018 and 2017, the Company had a total of $17,191 and $18,575, respectively, of accrued interest on unrecognized tax benefits which are included in “Accrued expenses and other liabilities” on the accompanying consolidated balance sheets. Based on its historical experience in dealing with various taxing authorities, the Company has found that it is the administrative practice of these authorities to not seek penalties from the Company for the tax positions it has taken on its returns, related to its unrecognized tax benefits. Therefore, the Company does not accrue penalties for the positions in which it has an unrecognized tax benefit. However, if such penalties were to be accrued, they would be recorded as a component of income tax expense.

The Company believes that within the next 12 months, it is reasonably possible that the unrecognized tax benefits as of December 31, 2018 will be reduced by approximately $11,570 due to statute expiration and effectively settled positions in various state jurisdictions.