Income Taxes

The components of income tax expense for the years ended December, 31 2018, 2017 and 2016 are as follows:



(in thousands)	2018		2017		2016
Current
Federal	$	32,042	$	20,215	$	16,713
State	3,868		1,869		1,124
	35,910		22,084		17,837
Deferred
Federal	160		1,797		(3,049		)
State	1,106		521		(522		)
	1,266		2,318		(3,571		)
	$	37,176	$	24,402	$	14,266

A reconciliation of differences between the statutory U.S. federal income tax rate and the Company’s effective tax rate from continuing operations for the years ended December 31, 2018, 2017 and 2016 follows:



	2018		2017		2016
Federal statutory rate	21.0	%	35.0	%	35.0	%
State taxes, net of federal tax	2.6		2.9		2.7
Nondeductible capitalized transaction costs	—		0.2		1.4
Nondeductible compensation expense	0.2		0.2		0.5
Nondeductible (permanent) items	0.2		0.9		1.0
IRC Section 199 manufacturing deduction	0.1		(2.5	)	(3.5	)
Changes in tax rates, including 2017 Tax Act	(0.2	)	(4.4	)	1.6
Changes related to IRC section 382 limitations	—		—		(3.9	)
Excess windfall benefit of stock compensation	(0.2	)	(2.3	)	(3.7	)
Other items	—		(0.2	)	0.5
Effective tax rate	23.7	%	29.8	%	31.6	%

On December 22, 2017, the 2017 Tax Act was enacted, which significantly changed U.S. tax law effective January 1, 2018 by, among other things, lowering corporate income tax rates from 35% to 21%, eliminating Internal Revenue Code (“IRC”) Section 199 manufacturing deduction, accelerating tax depreciation on certain acquired assets, further limiting executive compensation, and creating certain interest deduction limitations. The Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The Company recognized a net tax benefit of $3.6 million during the year ended December 31, 2017 related to the impact of the 2017 Tax Act for the remeasurement of deferred tax assets and liabilities. During the year ended December 31, 2018, the Company completed its accounting for the income tax effects of the 2017 Tax Act within the measurement period as provided under SEC Staff Accounting Bulletin No. 118, which resulted in recognizing an additional tax benefit of $0.5 million.

For the year ended December 31, 2018, the Company recognized $37.2 million of income tax expense, which included an income tax benefit of $0.5 million related to the 2017 Tax Act. The Company’s effective tax rate for the year ended December 31, 2018 was higher than the Company’s federal and state statutory rates primarily due to nondeductible expenses.

For the year ended December 31, 2017, the Company recognized $24.4 million of income tax expense, which included an income tax benefit of $3.6 million related to the 2017 Tax Act. The Company’s effective tax rate for the year ended December 31, 2017 was lower than the federal and state statutory rates primarily due to the effects of the 2017 Tax Act, an IRC Section 199 manufacturing deduction and excess windfall tax benefits of stock compensation deductions.

For the year ended December 31, 2016, the Company recognized $14.3 million of income tax expense, which included an income tax benefit of $1.7 million as a result of the Company adopting a state tax position related to IRC section 382 limitations on a state net operating loss carry-forward. For the year ended December 31, 2016, the Company’s effective tax rate, excluding the state tax position change, was lower than the Company’s federal and state statutory rates primarily due to excess windfall tax benefits of stock compensation deductions and an IRC section 199 manufacturing deduction.

Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, 2018 and 2017:



(in thousands)	2018			2017
Deferred tax assets related to:
Accounts receivable	$	2,278		$	2,061
Inventory	2,631			1,931
Accrued compensation	6,783			2,981
Insurance reserves	11,545			10,778
Stock-based compensation	3,399			2,388
Restructuring reserves	325			365
Other accrued liabilities	1,514			1,149
Federal net operating loss carryforward	16,349			17,372
State net operating loss carryforward	3,882			5,559
Other	1,915			1,633
	50,621			46,217
Valuation allowance	(145		)	(145		)
Total deferred tax assets	50,476			46,072

Deferred tax liabilities related to:
Goodwill and intangibles	(21,946		)	(21,030		)
Property and equipment	(29,684		)	(25,440		)
Other assets	(1,880		)	(1,370		)
Total deferred tax liabilities	(53,510		)	(47,840		)
Net deferred tax liability	$	(3,034	)	$	(1,768	)

As of December 31, 2018, due to IRC section 382 limitations, the Company estimates federal net operating loss carryforwards generated prior to November 2011 will be limited to approximately $4.8 million per year through 2034. These net operating losses may generally be carried forward 20 years. As a result, federal operating losses if unused will expire as follows:


•	$29.4 million in 2028;


•	$17.3 million in 2029; and


•	$31.2 million in years 2030 through 2034.

In addition, as of December 31, 2018, the Company had $75.1 million of state net operating loss carryforwards that expire at various dates commencing in 2022 through 2035.

The Company recognized tax benefits of $0.3 million and $1.9 million during 2018 and 2017, respectively, from stock-based compensation deductions into its income tax expense. Deferred tax assets relating to tax benefits of stock-based compensation were reduced to reflect exercises or vesting; however, some exercises or vesting resulted in tax deductions in excess of previously recorded deferred tax benefits (“windfalls”). Prior to the adoption of ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, windfall tax benefits were recognized as a component of shareholders’ equity, which included $0.4 million for December 31, 2016.

The Company recognized a current income tax payable of $0.9 million and an income tax receivable of $3.7 million as of December 31, 2018 and 2017, respectively. The Company paid federal and state income tax payments of $34.2 million and $23.5 million during 2018 and 2017, respectively. The Company received tax refunds of $2.9 million and $0.6 million in 2018 and 2017, respectively.

In accordance with ASC 740, the Company evaluates its deferred tax assets to determine if valuation allowances are required. In assessing the realizability of deferred tax assets, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of December 31, 2018 and 2017, the primary positive evidence considered to support the realization of the Company’s deferred tax assets includes: (i) the cumulative pre-tax income over the last 36 months, (ii) the reversal of deferred tax liabilities related to depreciation and amortization that would occur within the same jurisdiction and during the carry forward period necessary to absorb the federal and state net operating losses and other deferred tax assets, (iii) current and prior year utilization of federal and state net operating losses, and (iv) no history of material expiring tax attributes. The primary negative evidence considered includes: (i) the Company’s cumulative losses prior to 2013, (ii) unsettled circumstances associated with the general economy and housing market, as well as mortgage credit availability, and (iii) no federal and state net operating loss carryback opportunities. To the extent the Company generates future net operating losses, the Company may be required to increase the valuation allowance on its deferred tax assets and income tax benefit would be adversely affected.

Based upon the positive and negative evidence considered, the Company believes it is more likely than not that it will realize the benefit of the deferred tax assets, net of the existing state tax valuation allowances of $0.1 million as of December 31, 2018 and 2017. To the extent the Company generates sufficient taxable income in the future to fully utilize the tax benefits of the net deferred tax assets on which a valuation allowance was recorded, the Company’s effective tax rate would be impacted as the valuation allowance is reversed. The Company continues to evaluate its deferred tax asset on a quarterly basis and notes that, if economic conditions were to change such that the Company earns less taxable income than the amounts required to fully utilize its deferred tax asset, a portion of the asset may expire unused.

The following table shows the changes in the amount of the Company’s valuation allowance:



(in thousands)	2018		2017		2016
Balance at January 1,	$	145	$	125	$	126
Additions charged to expense	—		20		—
Additions charged to Goodwill/Purchase Accounting	—		—		—
Deductions - other	—		—		(1		)
Balance at December 31,	$	145	$	145	$	125

The Company has no material uncertain tax positions as of December 31, 2018 and 2017.

The Company’s state tax returns are open to examination for an average of three years. However, certain jurisdictions remain open to examination longer than three years due to the existence of net operating losses. The Company’s federal returns are open to examination for three years; however, due to statutory waivers, SBS’ tax years ended July 31, 2008 and May 5, 2009 remain open until July 31, 2020 with the federal tax authorities. SBS is currently under examination by the IRS for its tax years ended July 31, 2008 and May 5, 2009. At December 31, 2018 and 2017, the amount recognized related to expected tax, penalties and interest payments as a result of the IRS audits in income taxes payable and income taxes receivable, respectively, on the consolidated balance sheets was immaterial.

The Company’s policy is to recognize interest and penalties related to income tax liabilities and unrecognized tax benefits in income tax expense. During the years ended December 31, 2018, 2017 and 2016, penalties and interest related to income tax liabilities and uncertain tax benefits were not material.