Income Taxes

12 Months Ended

Dec. 31, 2019

The components of income tax expense for the years ended December, 31 2019, 2018 and 2017 are as follows:



(in thousands)	2019		2018		2017
Current
Federal	$	22,408	$	32,042	$	20,215
State	2,070		3,868		1,869
	24,478		35,910		22,084
Deferred
Federal	10,595		160		1,797
State	1,566		1,106		521
	12,161		1,266		2,318
	$	36,639	$	37,176	$	24,402

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, 2019, 2018 and 2017 follows:



	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	35.0	%
State taxes, net of federal tax	2.2		2.6		2.9
Nondeductible capitalized transaction costs	—		—		0.2
Nondeductible compensation expense	0.5		0.2		0.2
Nondeductible (permanent) items	0.3		0.2		0.9
IRC Section 199 manufacturing deduction	—		0.1		(2.5	)
Changes in tax rates, including 2017 Tax Act	—		(0.2	)	(4.4	)
Shortfall / (windfall) tax benefit of stock compensation	0.9		(0.2	)	(2.3	)
Other items	0.1		—		(0.2	)
Effective tax rate	25.0	%	23.7	%	29.8	%

On December 22, 2017, the Tax Cuts and Jobs Act (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 provisional 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, 2019, the Company recognized $36.6 million of income tax expense. During the the three months ended September 30, 2019 (which is included in the year ended December 31, 2019), the Company recorded an out of period expense of $1.5 million in Income tax expense and a corresponding increase to Income taxes payable to correct for a misstatement related to its calculation of excess windfall tax benefits on stock option exercises in certain prior periods (the “Income Tax Adjustment”). The Company has concluded that the financial impact of the Income Tax Adjustment is not material to any of its previously issued financial statements and that the correction of such Income Tax Adjustment is not material to financial results for the year ended December 31, 2019. The Company’s effective tax rate for the year ended December 31, 2019 was higher than the Company’s federal and state statutory rates primarily due to the Income Tax Adjustment and nondeductible expenses.

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.

Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31, 2019 and 2018:



(in thousands)	2019			2018
Deferred tax assets related to:
Accounts receivable	$	2,162		$	2,278
Inventory	4,694			2,631
Accrued compensation	5,531			6,783
Insurance reserves	12,447			11,545
Stock-based compensation	4,183			3,399
Restructuring reserves	444			325
Other accrued liabilities	1,170			1,514
Federal net operating loss carryforward	15,326			16,349
State net operating loss carryforward	2,663			3,882
Operating lease liabilities	34,529			—
Other	707			1,915
	83,856			50,621
Valuation allowance	(145		)	(145		)
Total deferred tax assets	83,711			50,476

Deferred tax liabilities related to:
Goodwill and intangibles	(22,696		)	(21,946		)
Property and equipment	(41,364		)	(29,684		)
Operating lease assets	(32,873		)	—
Other assets	(1,973		)	(1,880		)
Total deferred tax liabilities	(98,906		)	(53,510		)
Net deferred tax liability	$	(15,195	)	$	(3,034	)

As of December 31, 2019, 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:


•	$24.5 million in 2028;


•	$17.3 million in 2029; and


•	$31.2 million in years 2030 through 2034.

In addition, as of December 31, 2019, the Company had $53.0 million of state net operating loss carryforwards that expire at various dates commencing in 2022 through 2035.

Excluding the Income Tax Adjustment, the Company recognized tax benefits of $0.2 million, $0.3 million and $1.9 million during the years ended December 31, 2019, 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”).

The Company recognized a current income tax receivable of $7.5 million and a current income tax payable of $0.9 million as of December 31, 2019 and 2018, respectively. The Company paid federal and state income tax payments of $33.7 million, $34.2 million and $23.5 million during the years ended December 31, 2019, 2018, and 2017 respectively. The Company received tax refunds of $0.8 million, $2.9 million and $0.6 million during the years ended December 31, 2019, 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, 2019 and 2018, 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, 2019 and 2018. 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)	2019		2018		2017
Balance at January 1,	$	145	$	145	$	125
Additions charged to expense	—		—		20
Additions charged to Goodwill/Purchase Accounting	—		—		—
Deductions - other	—		—		—
Balance at December 31,	$	145	$	145	$	145

The Company has no material uncertain tax positions as of December 31, 2019 and 2018.

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, 2019 and 2018, 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, 2019, 2018 and 2017, penalties and interest related to income tax liabilities and uncertain tax benefits were not material.