Income Taxes

12 Months Ended

Sep. 30, 2020

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


	Fiscal Year Ended September 30,
in thousands	2020		2019		2018
Current federal (a)	$	(4,641)	$	(4,935)	$	57
Current state	485		693		512
Deferred federal (b)	20,639		(31,291)		102,082
Deferred state (c)	1,490		(1,684)		(8,167)
Total expense (benefit)	$	17,973	$	(37,217)	$	94,484

(a) Fiscal 2020 federal current benefit is primarily driven by the expected refund of our remaining alternative minimum tax credit balance due to the enactment of the CARES Act. Fiscal 2019 federal current benefit is primarily driven by the expected refund of half of our outstanding alternative minimum tax credit that became refundable due to the enactment of the Tax Cuts and Jobs Act. See further discussion 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 as a result of the Tax Cuts and Jobs Act, 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 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	2020		2019		2018
Income tax computed at statutory rate	$	14,971	$	(24,494)	$	12,112
State income taxes, net of federal benefit	1,300		(590)		111
Deferred rate change	260		(88)		110,071
Decrease in valuation allowance - other (a)	—		—		(27,370)
Changes in uncertain tax positions	(2)		(7)		598

Permanent differences	2,177		2,908		2,133
Tax credits	(939)		(14,902)		(3,174)
Other, net	206		(44)		3
Total expense (benefit)	$	17,973	$	(37,217)	$	94,484

(a) For fiscal 2018, amount represents 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 and the enactment of the Tax Cuts and Jobs Act, our fiscal 2018 provision was calculated using a blended 24.5% federal tax rate.

The principal differences between our effective tax rate and the U.S. federal statutory rate for fiscals 2020 and 2019 relate to state taxes, permanent differences and tax credits.

We recognized income tax expense from continuing operations of $18.0 million in our fiscal 2020, compared to income tax benefit from continuing operations of $37.2 million in our fiscal 2019 and income tax expense from continuing operations of $94.5 million in our fiscal 2018. The income tax expense in our fiscal 2020 primarily resulted from income generated in the current year and our permanent book/tax differences, partially offset by the generation of additional federal tax credits. The income tax benefit in our fiscal 2019 primarily resulted from the loss generated in the fiscal year and the generation of additional federal tax credits. In fiscal 2018, our income tax expense 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 federal tax credits. 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 2020, 2019, and 2018 are not meaningful metrics, as our income tax amounts were not directly correlated to the amount of our pretax income (loss) for those periods.

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, 2020 and September 30, 2019:


in thousands	September 30, 2020		September 30, 2019
Deferred tax assets:
Federal and state tax carryforwards	$	192,981	$	208,360
Inventory adjustments	34,971		42,605
Intangible assets	13,993		17,209
Incentive compensation	13,116		9,360
Warranty and other reserves	5,503		4,302
Property, equipment and other assets	2,197		2,255
Uncertain tax positions	723		729
Other	844		623
Total deferred tax assets	264,328		285,443




Valuation allowance	(39,185)		(38,486)
Net deferred tax assets	$	225,143	$	246,957

As of September 30, 2020, our gross deferred tax assets above included $120.0 million for federal net operating loss carryforwards, $42.8 million for state net operating loss carryforwards, and $33.6 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 2040. 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. For the year-ended September 30, 2019, we recorded our initial refund claim of $4.6 million, or half of our outstanding $9.2 million credit. During fiscal 2020, the enactment of the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020 enabled us to claim the entire $9.2 million alternative minimum tax credit with the filing of our fiscal 2019 return and the amount 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 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.

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 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 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.

During 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.

In fiscal 2020, we analyzed a number of additional positive and negative factors to determine whether we are more likely than not to realize all our federal tax attributes and certain portions of our state tax attributes. The significant positive factors included our current earnings from continuing operations and increased backlog over the prior year, as well as continued interest savings from our current debt reduction strategy. The negative factors for fiscal 2020 generally included uncertainties and long-term impacts to the broader economy as a result of the COVID-19 pandemic. Our fiscal 2020 determinations remain consistent with our fiscal 2018 and 2019 determinations. As of September 30, 2020, the Company will have to cumulatively generate approximately $915.5 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 2040. As we continue to monitor the impacts of the COVID-19 pandemic on our business, any sustained or prolonged reductions in future earnings periods may change our conclusions on whether we are more likely than not to realize portions of our deferred tax assets.

As of September 30, 2020, valuation allowance of $39.2 million 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	2020		2019		2018
Balance at beginning of year	$	3,473	$	3,494	$	3,804
Additions for tax positions related to current year	—		—		—
Additions for tax positions related to prior years	—		—		—
Reductions in tax positions of prior years	—		—		—

Lapse of statute of limitations	(32)		(21)		(310)
Balance at end of year	$	3,441	$	3,473	$	3,494

If we were to recognize our $3.4 million of gross unrecognized tax benefits remaining as of September 30, 2020, substantially all would impact our effective tax rate. Additionally, we had no accrued interest and penalties as of September 30, 2020 and an immaterial amount of accrued interest and penalties as of September 30, 2019. We record interest and penalties related to unrecognized tax benefits in income tax expense within our consolidated statements of operations.

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, 2020, it is reasonably possible that $83 thousand of our uncertain tax positions will reverse within the next twelve months.