Income Taxes

The Company's (benefit) expense from income taxes from continuing operations consists of the following for the periods presented:



	Fiscal Year Ended September 30,
in thousands	2019			2018			2017
Current federal ^(a)	$	(4,935	)	$	57		$	—
Current state	693			512			859
Deferred federal ^(b)	(31,291		)	102,082			1,625
Deferred state ^(c)	(1,684		)	(8,167		)	212
Total (benefit) / expense	$	(37,217	)	$	94,484		$	2,696

^(a) Fiscal 2019 federal current benefit is primarily driven by the expected refund of half of our outstanding minimum tax credit balance as discussed below.

^(b) Fiscal 2018 federal deferred expense is primarily driven by the remeasurement of our deferred tax asset at the newly enacted 21.0% federal tax rate, partially offset by the release of the remaining valuation allowance on our federal deferred tax assets.

^(c)Fiscal 2018 state deferred benefit is primarily driven by the release of valuation allowance in certain operating jurisdictions; refer to discussion below titled “Valuation Allowance.”

The (benefit) expense from income taxes from continuing operations differs from the amount computed by applying the federal income tax statutory rate as follows for the periods presented:



	Fiscal Year Ended September 30,
in thousands	2019			2018			2017
Income tax computed at statutory rate	$	(24,494	)	$	12,112		$	12,052
State income taxes, net of federal benefit	(590		)	111			1,287
Deferred rate change	(88		)	110,071			—
Decrease in valuation allowance - other ^{(a) (b)}	—			(27,370		)	(3,482		)
Changes in uncertain tax positions	(7		)	598			(685		)
Stock based compensation	—			—			741
Permanent differences	2,908			2,133			496
Tax credits	(14,902		)	(3,174		)	(7,460		)
Other, net	(44		)	3			(253		)
Total (benefit) / expense	$	(37,217	)	$	94,484		$	2,696

^(a)For fiscal 2018, amount includes a $27.4 million release of the valuation allowance on our federal and state deferred tax assets; refer to discussion below titled “Valuation Allowance.” Due to our fiscal year end, our fiscal provision was calculated using a blended 24.5% federal tax rate. The increase in permanent differences in fiscal 2018 compared to the prior fiscal year was largely driven by the limits on deductibility for executive compensation for current year incentive awards and anticipated limitations on unvested stock awards due to the enactment of the Tax Cuts and Jobs Act.

^(b)For fiscal 2017, amount includes $3.5 million release of the valuation allowance on our state deferred tax assets due to a number of changes to the legal forms of our operating entities; refer to discussion below titled “Valuation Allowance.”

The principal differences between our effective tax rate and the U.S. federal statutory rate for fiscal 2019 relate to state taxes, permanent differences and tax credits.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax assets are as follows as of September 30, 2019 and September 30, 2018:



in thousands	September 30, 2019			September 30, 2018
Deferred tax assets:
Federal and state tax carryforwards	$	208,360		$	196,702
Inventory adjustments	42,605			29,565
Intangible assets	17,209			192
Incentive compensation	9,360			11,959
Warranty and other reserves	4,302			6,350
Property, equipment and other assets	2,255			2,123
Uncertain tax positions	729			734
Other	623			542
Total deferred tax assets	285,443			248,167
Valuation allowance	(38,486		)	(34,212		)
Net deferred tax assets	$	246,957		$	213,955

As of September 30, 2019, our gross deferred tax assets above included $132.2 million for federal net operating loss carryforwards, $42.3 million for state net operating loss carryforwards, $4.6 million for an alternative minimum tax credit and $32.7 million for general business credits. The net operating loss carryforwards expire at various dates through 2033, and the general business credits expire at various dates through 2038. The alternative minimum tax credit became a refundable credit when the alternative minimum tax was eliminated with the enactment of the Tax Cuts and Jobs Act on December 22, 2017. We will make claims for half of our remaining balance on each of our next three tax returns beginning with our fiscal 2019, until all remaining credits are refunded in the fourth year. For fiscal 2019, the $4.6 million refundable portion of our alternative minimum tax credit was recorded in our income tax receivable. We experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code (Section 382) as of January 12, 2010. Section 382 contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss carryforwards (NOLs) and certain built-in losses or deductions recognized during the five-year period after the ownership change to offset future taxable income. Because the five-year period has expired, we have determined the actual impact and final classification of those amounts, which are properly reflected in the amounts presented above. The actual realization of our deferred tax assets is difficult to predict and is dependent on future events.

We recognized income tax benefit from continuing operations of $37.2 million in our fiscal 2019, compared to income tax expense from continuing operations of $94.5 million and $2.7 million in our fiscal 2018 and fiscal 2017, respectively. The income tax benefit in our fiscal 2019 primarily resulted from loss in the current year and the generation of additional federal tax credits. The income tax expense in our fiscal 2018 primarily resulted from income generated in the fiscal year and the remeasurement of our deferred tax asset at a lower 21% federal tax rate, partially offset by the additional release of valuation allowance and the generation of additional federal tax credits. In fiscal 2017, our income tax expense primarily resulted from income generated in the fiscal year, partially offset by the generation of federal tax credits and an additional benefit resulting from changes to our valuation allowance due to changes in our state net operating loss estimates. Due to the effects of changes in our valuation allowance on our deferred tax balance, tax credits and changes in our unrecognized tax benefits, our effective tax rates in fiscal 2019, 2018, and 2017 are not meaningful metrics, as our income tax amounts were not directly correlated to the amount of our pretax income for those periods.

Valuation Allowance

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company's experience with loss carryforwards not expiring unused and tax planning alternatives.

During fiscal 2017, we recorded impacts related to our tax elections and changes in legal form as further determinations were made throughout the year. These impacts included changes to our apportionment and deferred balances by jurisdiction, as well as changes to our uncertain tax positions. As a result, we recorded a decrease of 3.5 million in valuation allowance during the quarter ended September 30, 2017 for changes in our expected state net operating loss utilization due to changes in our uncertain tax positions.

During fiscal 2018, we concluded that it was more likely than not that all of our federal tax attributes and additional portions of our state tax assets would be realized over their remaining recovery periods. This conclusion was based on an evaluation of all relevant evidence, both positive and negative, that would impact our ability to realize our deferred tax assets. The positive evidence included continued improvements in our pre-tax earnings profile, recent acquisitions and community count growth in future years, tax planning strategies, and increases to our future taxable income due to the enactment of the Tax Cuts and Jobs Act. The negative evidence included a number of factors within the homebuilding industry, notably recent market related impacts to costs of production, labor constraints, mortgage interest rate forecasts, and the position of the current housing cycle. We continue to maintain levels of backlog and community count to support our expectations of future profitability. During the fiscal 2018, the Company completed its plan to repurchase portions of its outstanding debt, which altered its debt maturity and interest rate profile through new issuances and redemptions of prior issuances. The change in the Company's debt portfolio will create future interest expense savings that further support its estimates of future profitability.

In fiscal 2019, our conclusions on whether we are more likely than not to realize all of our federal tax attributes and certain portions of our state tax attributes remain consistent with our fiscal 2018 determinations. For fiscal 2019, a number of additional positive and negative factors were considered as part of our analysis. The negative factors for fiscal 2019 included current period operating losses, primarily a result of impairments recorded on a number of long held assets in our California submarkets and a loss on debt extinguishment charge in the fourth quarter. The positive factors included a recovery in housing demand throughout the year that resulted in backlog levels consistent with prior year, interest savings from our current year debt repurchases and debt refinance, a new multi-year debt reduction strategy, and additional changes in our taxable income as we continue to account for the changes to the tax code under the Tax Cuts and Jobs Act and the related state impacts. As of September 30, 2019, the Company will have to cumulatively generate approximately $944.0 million in pre-tax income over the course of its carryforward period to realize its deferred tax assets prior to their expiration, which, as previously discussed, is the Company's fiscal 2038.

The valuation allowance of $38.5 million as of September 30, 2019 remains on various state attributes for which the Company has concluded it is not more likely than not that these attributes would be realized at that time.

Unrecognized Tax Benefits

A reconciliation of our unrecognized tax benefits is as follows for the beginning and end of each period presented:



	Fiscal Year Ended September 30,
in thousands	2019			2018			2017
Balance at beginning of year	$	3,494		$	3,804		$	4,541
Additions for tax positions related to current year	—			—			61
Additions for tax positions related to prior years	—			—			2,611
Reductions in tax positions of prior years	—			—			(2,273		)
Lapse of statute of limitations	(21		)	(310		)	(1,136		)
Balance at end of year	$	3,473		$	3,494		$	3,804

If we were to recognize our $3.5 million of gross unrecognized tax benefits remaining as of September 30, 2019, substantially all would impact our effective tax rate. Additionally, we had an immaterial amount of accrued interest and penalties as of September 30, 2019 and 2018, respectively. Our income tax expense includes tax-related interest.

In the normal course of business, we are subject to audits by federal and state tax authorities regarding various tax liabilities. Certain state income tax returns for various fiscal years are under routine examination. The statute of limitations for our major tax jurisdictions remains open for examination for fiscal years 2007 and subsequent years. As of September 30, 2019, it is reasonably possible that $32 thousand of our uncertain tax positions will reverse within the next twelve months.