Income Taxes

The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.

In accordance with ASC 740-10, Income Taxes (“ASC 740”), we evaluate our deferred tax assets, including the benefit from net operating losses (“NOLs”) and tax credit carryforwards, to determine if a valuation allowance is required. Companies must assess, using significant judgments, whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment gives appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, our experience with operating losses and our experience of utilizing tax credit carryforwards and tax planning alternatives. Based upon a review of all available evidence, we recorded a full valuation allowance against our deferred tax assets during 2008 due to economic conditions and the weight of negative evidence at the time.

However, during 2013, the Company, giving the same consideration to positive and negative evidence described above, concluded that it was more likely than not that the majority of its deferred tax assets would be utilized. As a result of such determination, the Company reversed the majority of the valuation allowance against its deferred tax assets during the year ended December 31, 2013, and the remaining $9.3 million valuation allowance during the first two quarters of 2014.

At December 31, 2014, the Company’s total deferred tax assets were $96.0 million which is offset by $1.6 million of total deferred tax liabilities for a $94.4 million net deferred tax asset which is reported on the Company’s Consolidated Balance Sheets.

The tax effects of the significant temporary differences that comprise the deferred tax assets and liabilities are as follows:



	December 31,
(In thousands)	2014		2013
Deferred tax assets:
Warranty, insurance and other accruals	$	13,155	$	12,003
Inventory	11,049		16,657
State taxes	175		106
Net operating loss carryforward	69,946		91,659
Deferred charges	1,711		897
Total deferred tax assets	$	96,036	$	121,322
Less valuation allowance	$	—	$	(9,291	)
Total deferred tax assets, net of valuation allowance	$	96,036	$	112,031

Deferred tax liabilities:
Depreciation	$	1,191	$	774
Prepaid expenses	433		346
Total deferred tax liabilities	$	1,624	$	1,120

Net deferred tax asset, net of valuation allowance	$	94,412	$	110,911

The provision (benefit) from income taxes consists of the following:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Current:
Federal	$	1,766		$	2		$	208
State	681			821			(796		)
	$	2,447		$	823		$	(588	)

	Year Ended December 31,
(In thousands)	2014			2013			2012
Deferred:
Federal	$	22,141		$	(102,830	)	$	—
State	(5,641		)	(8,081		)	—
	$	16,500		$	(110,911	)	$	—
Total	$	18,947		$	(110,088	)	$	(588	)

For 2014, 2013 and 2012, the Company’s effective tax rate was 27.17%, (266.33)%, and (4.61)%, respectively. Reconciliation of the differences between income taxes computed at the federal statutory tax rate and consolidated benefit from income taxes are as follows:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Federal taxes at statutory rate	$	24,407		$	14,467		$	4,466
State and local taxes – net of federal tax benefit	2,199			534			829
Change in unrecognized tax benefit	—			—			(1,346		)
Change in valuation allowance	(9,291		)	(126,458		)	(5,076		)
Change in state NOL deferred asset – net of federal tax benefit	1,780			853			(312		)
Other	(148		)	516			851
Total	$	18,947		$	(110,088	)	$	(588	)

The Company files income tax returns in the U.S. federal jurisdiction, and various states. The Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years before 2010. The Company is audited from time to time, and if any adjustments are made, they would be either immaterial or reserved.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. At December 31, 2014, 2013 and 2012, we had no unrecognized tax benefits due to the lapse of the statue of limitations and completion of audits in prior years. We believe that our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change.

At December 31, 2014, the Company had federal NOL carryforwards of approximately $51.3 million and federal credit carryforwards of $6.9 million. Our federal NOL carryforwards may be carried forward up to 18 years to offset future taxable income with the federal carryforward benefits beginning to expire in 2028. The Company had $11.8 million of state NOL carryforwards at December 31, 2014. Our state NOLs may be carried forward from one to 18 years, depending on the tax jurisdiction, with $5.3 million expiring between 2015 and 2027 and $6.5 million expiring between 2028 and 2032, absent sufficient state taxable income.

On February 1, 2014, M/I Financial Corp. was converted from a wholly-owned Ohio C corporation to a wholly-owned Ohio limited liability company, and its name was changed to M/I Financial, LLC.

On December 19, 2014, the President signed The Tax Increase Prevention Act of 2014 which retroactively extends for one year the bulk of the temporary tax deductions, credits, and incentives that expired at the end of 2013. Among other things, the Act extended to 2014 the business tax credit under IRC §45L for building new energy efficient homes and bonus depreciation. Under ASC 740, the effects of a change in tax law are recognized as of the enactment date. In accordance with this guidance, we recorded a tax benefit of approximately $0.2 million in 2014 related to the extension of the IRC §45L tax credit for qualifying new energy efficient homes that we sold in 2014.