10. Income Taxes

The following discussion regarding our income taxes should be read in conjunction with Notes 2 and 14 to the audited consolidated financial statements in our 2013 Form 10-K.

We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the recognition of income taxes currently payable or receivable, as well as deferred tax assets and liabilities resulting from temporary differences between the amounts reported for financial statement purposes and the amounts reported for income tax purposes at each balance sheet date using enacted statutory tax rates for the years in which taxes are expected to be paid, recovered or settled. Changes in tax rates are recognized in earnings in the period in which the changes are enacted. The components of the Company’s income tax benefit (expense) are summarized in the table below.

	Three Months Ended March 31,
	2014			2013
	(in thousands)

Federal	$	(1,316	)	$	—
State	(344		)	85
Income tax benefit (expense)	$	(1,660	)	$	85

The Company’s effective income tax rate during the three months ended March 31, 2014 was 52.9% (after excluding net income attributable to noncontrolling interests, which is not tax-effected in our consolidated financial statements). Such rate was higher than the customary blended federal and state income tax rate primarily due to certain non-deductible stock-based compensation expense, partially offset by reductions in the Company’s deferred tax asset valuation allowances during such period. Due to the effects of changes in the Company’s deferred tax asset valuation allowances, its effective income tax rate during the three months ended March 31, 2013 was not meaningful as the income tax benefit for such period did not directly correlate to the Company’s income from operations before income taxes. Specifically, during the three months ended March 31, 2013, the Company (i) used a portion of its deferred tax asset valuation allowance to fully offset the income taxes on income from operations and (ii) recognized a benefit due to a state tax refund from a prior year.

The Company had no unrecognized income tax benefits at either March 31, 2014 or December 31, 2013. We believe that the Company’s federal and state tax filing positions and tax deductions would be sustained on audit and we do not anticipate any adjustments that would result in a material change thereto.

ASC 740 requires that companies assess whether deferred tax asset valuation allowances should be established based on consideration of all of the available evidence using a “more-likely-than-not” standard. A valuation allowance must be established when it is more-likely-than-not that some or all of a company’s deferred tax assets will not be realized. We assess our deferred tax assets on a quarterly basis, including the benefits from federal and state net operating loss carryforwards, to determine if valuation allowances are required. When making a determination as to the adequacy of our deferred tax asset valuation allowance, we consider all of the available objectively verifiable positive and negative evidence. If we determine that the Company will not be able to realize some or all of its deferred tax assets in the future, a valuation allowance will be recorded though the provision for income taxes.

As of December 31, 2013, we reviewed the evidence that was available at the time and determined that the Company’s deferred tax asset valuation allowances on certain of its federal and Florida deferred tax assets were no longer needed. Accordingly, the Company reversed $125.6 million of its deferred tax asset valuation allowances during the quarter and year ended December 31, 2013. The remaining valuation allowance primarily relates to (i) potential limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state limitations for federal and Florida income and franchise tax purposes and (ii) certain states other than Florida where the more-likely-than-not realization threshold criteria has not been met. As of March 31, 2014, the Company had a deferred tax asset of $124.0 million, which was net of a valuation allowance of $70.3 million. Prospectively, we will continue to review the Company’s deferred tax assets and the related valuation allowances in accordance with ASC 740 on a quarterly basis.

Our accounting for deferred tax assets represents our best estimate of future events. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, including carryforward period assumptions, actual results could differ from our estimates. Our assumptions require significant judgment because the homebuilding industry is cyclical and highly sensitive to changes in economic conditions. If the Company’s future results of operations are less than projected or if the timing and jurisdiction of its future taxable income varies from our estimates, there may be insufficient objectively verifiable positive evidence to support a more-likely-than-not assessment of the Company’s deferred tax assets and an increase to our valuation allowance may be required at that time for some or all of such deferred tax assets.