11.

Income Taxes

The provision for income taxes consists of the following:


	Year Ended December 31,
	2013			2012		2011
*Current:*
Federal	$	137,675		$	76,599	$	45,112
State		30,352			3,066		8,004

*Deferred:*
Federal		(13,402	)		13,086		21,492
State		(2,406	)		1,738		3,548

	$	152,219		$	94,489	$	78,156

In addition to amounts applicable to income before taxes, the following income tax benefits were recorded in shareholders’ equity:


	Year Ended December 31,
	2013		2012		2011
Income tax benefits arising from compensation expense for tax purposes in excess of amounts recognized for financial statement purposes	$	20,636	$	14,319	$	22,835

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


	December 31,
	2013		2012
Deferred tax assets:
Other accrued expenses and contract land deposit reserve	$	90,372	$	77,475
Deferred compensation		8,049		10,923
Equity-based compensation expense		35,298		26,151
Inventory		11,099		10,914
Unrecognized tax benefit		23,784		22,295
Other		4,200		5,606

Total deferred tax assets		172,802		153,364
Less: deferred tax liabilities		4,290		1,702

Net deferred tax position	$	168,512	$	151,662

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 available carry-backs and 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 $362,387 for the year ended December 31, 2013, and was $187,064 for the year ended December 31, 2012.

A reconciliation of income tax expense in the accompanying consolidated statements of income to the amount computed by applying the statutory federal income tax rate of 35% to income before taxes is as follows:


	Year Ended December 31,
	2013			2012			2011
Income taxes computed at the federal statutory rate	$	146,544		$	96,277		$	72,652
State income taxes, net of federal income tax benefit		18,210			3,226			7,974
Other, net		(12,535	)		(5,014	)		(2,470	)

	$	152,219		$	94,489		$	78,156

The Company’s effective tax rate in 2013, 2012 and 2011 was 36.36%, 34.35% and 37.65%, respectively. During 2012, the Company reduced its provision for unrecognized tax benefits by $9,154, which reduced the 2012 effective tax rate. The reduction resulted from settlements with and an audit by certain taxing authorities during 2012 which led the Company to update its evaluation of the administrative practice in other states for similar uncertain tax positions to determine whether the positions taken in those states were effectively settled.

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 2010.

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


	Year Ended December 31,
	2013			2012
Balance at beginning of year	$	40,244		$	45,049
Additions based on tax positions related to the current year		5,618			4,185
Reductions for tax positions of prior years		(2,066	)		(8,928	)
Settlements		—			(62	)

Balance at end of year	$	43,796		$	40,244

If recognized, the total amount of unrecognized tax benefits that would affect the effective tax rate (net of the federal tax benefit) is $28,467.

The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. For the year ended December 31, 2013, the Company accrued interest on unrecognized tax benefits in the amount of $625. For the year ended December 31, 2012, the Company recognized a net reversal of accrued interest on unrecognized tax benefits in the amount of $4,116. For the year ended 2011, the Company accrued interest on unrecognized tax benefits in the amount of $2,076. As of December 31, 2013 and 2012, the Company had a total of $21,281 and $20,658, 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, 2013 will be reduced by approximately $6,527 due to statute expiration and effectively settled positions in various state jurisdictions. The Company is currently under audit by the states of New York and Pennsylvania.