Income Taxes

12 Months Ended

Dec. 31, 2020

Components of current and deferred income tax expense (benefit) are as follows ($000’s omitted):


	2020		2019		2018
Current expense (benefit)
Federal	$	159,677	$	196,186	$	(44,462)
State and other	24,580		21,252		7,202
	$	184,257	$	217,438	$	(37,260)
Deferred expense (benefit)
Federal	$	116,484	$	74,700	$	271,544
State and other	21,114		30,738		91,233
	$	137,598	$	105,438	$	362,777
Income tax expense (benefit)	$	321,855	$	322,876	$	325,517

The following table reconciles the statutory federal income tax rate to the effective income tax rate:


	2020		2019		2018
Income taxes at federal statutory rate	21.0	%	21.0	%	21.0	%
State and local income taxes, net of federal tax	3.3		3.7		4.0
Tax accounting method change	—		—		(2.5)
Federal tax credits	(4.8)		(0.2)		(0.4)
Changes in tax laws, including the Tax Act	—		0.2		1.0
Deferred tax asset valuation allowance	(0.8)		(0.4)		0.9

Other	(0.1)		(0.2)		0.2
Effective rate	18.6	%	24.1	%	24.2	%

The 2020 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient home credits and changes in valuation allowances relating to projected utilization of certain state net operating loss ("NOL") carryforwards, partially offset by state income tax expense on current year earnings. Income tax expense for 2020 includes a benefit of $82.0 million associated with the extension of federal energy efficient home credits, including $56.8 million related to homes closed in prior open tax years. This provision, which had previously expired in 2017, has been extended to apply to homes closed through December 31, 2021. The 2019 effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings, changes in valuation allowances relating to projected utilization of certain state NOL carryforwards, and state tax law changes. The 2018 effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings, tax benefits due to Internal Revenue Service ("IRS") acceptance of a tax accounting method change applicable to the 2017 tax year, valuation allowances relating to projected utilization of certain NOL carryforwards, and state tax law changes. The acceptance of the tax accounting method change provided a deferral of profit on home sales, which resulted in a favorable adjustment in 2018 due to the tax rate reduction in the Tax Act.

Deferred tax assets and liabilities reflect temporary differences arising from the different treatment of items for tax and accounting purposes. Components of our net deferred tax asset are as follows ($000’s omitted):


	At December 31,
	2020		2019
Deferred tax assets:
Accrued insurance	$	135,703	$	142,515
Inventory valuation reserves	78,518		97,585
Other	58,686		64,373
NOL carryforwards:
Federal	—		12,962
State	184,046		200,710
Tax credits	5,344		8,648
	462,297		526,793
Deferred tax liabilities:
Deferred income	(313,170)		(228,186)
Intangibles and other	(46,595)		(44,547)
	(359,765)		(272,733)
Valuation allowance	(69,813)		(83,953)
Net deferred tax asset	$	32,719	$	170,107

We have state NOLs in various jurisdictions which may generally be carried forward up to 20 years, depending on the jurisdiction. Our state NOL carryforward deferred tax assets will expire if unused at various dates as follows: $36.4 million from 2021 to 2025 and $147.6 million from 2026 and thereafter.

We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. housing industry and broader economy.

The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. We had $30.9 million and $40.3 million of gross unrecognized tax benefits at December 31, 2020 and 2019, respectively. If recognized, $24.4 million and $21.6 million, respectively, of these amounts would impact our effective tax rate. Additionally, we had accrued interest and penalties of $2.8 million and $6.5 million at December 31, 2020 and 2019, respectively.

We do not expect the total amount of gross unrecognized tax benefits to increase or decrease by a material amount within the next twelve months. A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted):


	2020		2019		2018
Unrecognized tax benefits, beginning of period	$	40,300	$	30,554	$	48,604
Increases related to positions taken during a prior period	—		2,376		5,389
Decreases related to positions taken during a prior period	(12,981)		(7,918)		(31,850)
Increases related to positions taken during the current period	11,001		16,332		8,411
Decreases related to settlements with taxing authorities	(7,465)		(1,044)		—

Unrecognized tax benefits, end of period	$	30,855	$	40,300	$	30,554

We continue to participate in the Compliance Assurance Process (“CAP”) with the IRS as an alternative to the traditional IRS examination process. Through the CAP program, we work with the IRS to achieve tax compliance by resolving issues prior to filing the tax return. We are also currently under examination by state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The outcome of these examinations is not yet determinable, and we are not aware of unrecorded liabilities. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2016 to 2020.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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