Income Taxes

12 Months Ended

Dec. 31, 2019

The provision for income tax attributable to income before income taxes consisted of (in thousands):



	Year Ended December 31,
	2019		2018			2017
Current:
Federal	$	38,782	$	70,098		$	95,814
State	7,253		10,941			8,961
Total current taxes	46,035		81,039			104,775
Deferred:
Federal	9,698		(350		)	37,151
State	8,167		9,863			10,341
Total deferred taxes	17,865		9,513			47,492
Total income tax expense	$	63,900	$	90,552		$	152,267

The Company’s provision for income taxes was different from the amount computed by applying the statutory federal income tax rate of 21% to the underlying income before income taxes as a result of the following (in thousands):



	Year Ended December 31,
	2019			2018			2017
Taxes at the U.S. federal statutory rate	$	56,935		$	76,009		$	118,936
State income taxes, net of federal tax impact	10,221			13,603			10,712
Domestic production activities deduction	—			—			(7,108		)
Non-deductible transaction costs	145			234			541
Change in valuation allowance	(3		)	—			3,256
Tax Cuts and Jobs Act	—			(740		)	21,961
Federal energy credits	(6,873		)	—			—
Other, net	3,475			1,446			3,969
Total income tax expense	$	63,900		$	90,552		$	152,267
Effective income tax rate	23.6		%	25.0		%	44.8		%

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis, and for operating loss and tax credit carryforwards. Deferred taxes consisted of the following at December 31, 2019 and 2018 (in thousands):



	Year Ended December 31,
	2019			2018
Deferred tax assets:
Impairment and other valuation reserves	$	31,781		$	37,573
Incentive compensation	5,818			5,946
Indirect costs capitalized	21,160			20,348
Operating lease liability	14,210			—
Net operating loss carryforwards (state)	13,254			18,702
State taxes	1,315			2,275
Other costs and expenses	10,909			10,848
Gross deferred tax assets	98,447			95,692
Valuation allowance	(3,450		)	(3,449		)
Deferred tax assets, net of valuation allowance	94,997			92,243
Deferred tax liabilities:
Interest capitalized	(7,944		)	(7,355		)
Basis difference in inventory	(6,982		)	(8,170		)
Fixed assets	(10,766		)	(2,473		)
Intangibles	(5,062		)	(5,187		)
Operating lease asset	(13,131		)	—
Deferred financing costs	(757		)	(802		)
Other	(451		)	(488		)
Deferred tax liabilities	(45,093		)	(24,475		)
Net deferred tax assets	$	49,904		$	67,768

On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted, reducing the U.S. federal corporate income tax rate from 35% to 21%, among other changes. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. During the year ended December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21%) by recording a provisional amount of $22.0 million. During the year ended December 31, 2018, we completed our accounting for all of the enactment-date income tax effects of the Act, and recorded a benefit of $740,000 due to favorable provision to return adjustments upon filing of the federal consolidated return.

The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates for the years in which taxes are expected to be paid or recovered. Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable. Our assessment considers, among other things, the nature, frequency and severity of our current and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods and tax planning alternatives.

As of December 31, 2019, the Company had a state net operating loss carryforward of $197.0 million, which will expire between 2028 and 2036. As of December 31, 2019 and 2018, we had a valuation allowance on our deferred tax assets of $3.5 million and $3.4 million, respectively. The valuation allowance as of December 31, 2019 and 2018 primarily related to an impairment of our investment in an unconsolidated joint venture that, if dissolved, would result in a capital loss, the realization of which is uncertain.

The Company will continue to evaluate both positive and negative evidence in determining the need for a valuation allowance against its deferred tax assets. Changes in positive and negative evidence, including differences between the Company’s future operating results and the estimates utilized in the determination of the valuation allowance, could result in changes in the Company’s estimate of the valuation allowance against its deferred tax assets. 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 allowance against the Company’s deferred tax assets.

Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have taken on previously filed tax returns are not sustained. These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained, such as federal deduction that could be realized if an unrecognized state deduction was not sustained.

The Company files income tax returns in the U.S., including federal and multiple state and local jurisdictions. We are currently under examination by the IRS for federal tax year 2017 and California for tax years 2015 and 2016. The outcome of these examinations is not yet determinable. The Company’s tax years 2016 to 2018 will remain open to examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss or credit carryforwards.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in thousands):



	Year Ended December 31,
	2019			2018
Balance at beginning of year	$	1,014		$	1,521
Increase (decrease) related to prior year tax positions	(507		)	(507		)
Balance at end of year	$	507		$	1,014

The Company classifies interest and penalties related to income taxes as part of income tax expense. The Company has not recorded any tax expense for interest and penalties on uncertain tax positions during the years ended December 31, 2019, 2018 and 2017. The Company estimates that the uncertain tax positions, if reversed, would result in a tax benefit of approximately $486,000.