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Income Taxes
 12 Months Ended
Sep. 30, 2022
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXES
Income Tax Expense

The components of the Company’s income tax expense are as follows:
 Year Ended September 30,
 202220212020
 (In millions)
Current tax expense:   
Federal$1,448.9 $978.1 $484.0 
State256.1 197.0 104.4 
 1,705.0 1,175.1 588.4 
Deferred tax expense (benefit):   
Federal21.2 (12.7)20.0 
State7.9 2.7 (5.9)
 29.1 (10.0)14.1 
Total income tax expense$1,734.1 $1,165.1 $602.5 

The Company’s effective tax rate was 22.7%, 21.8% and 20.2% in fiscal 2022, 2021 and 2020, respectively. The effective tax rates for all years include an expense for state income taxes and tax benefits related to stock-based compensation and federal energy efficient homes tax credits. The effective tax rate for fiscal 2020 also includes a reduction for a tax benefit related to the release of a valuation allowance against the Company’s state deferred tax assets.

The federal energy efficient homes tax credit was retroactively extended to qualifying homes closed from January 1, 2022 through December 31, 2032 as a result of the enactment of the Inflation Reduction Act (IRA) that was signed into law on August 16, 2022. Other tax related provisions of the IRA had no material impact on the Company’s financial statements.

Reconciliation of Expected Income Tax Expense

Differences between income tax expense and tax computed by applying the federal statutory rate of 21% to income before income taxes during each year is due to the following:
 Year Ended September 30,
 202220212020
 (In millions)
Income taxes at federal statutory rate$1,602.2 $1,124.8 $626.4 
Increase (decrease) in tax resulting from:
State income taxes, net of federal benefit210.0 166.9 79.1 
Valuation allowance(2.1)(3.3)(11.2)
Tax credits(100.8)(116.3)(93.4)
Excess tax benefit from stock-based compensation(20.1)(38.4)(22.3)
Tax contingencies— (6.0)8.9 
Other44.9 37.4 15.0 
Total income tax expense$1,734.1 $1,165.1 $602.5 
Deferred Income Taxes

Deferred tax assets and liabilities reflect the tax consequences of temporary differences between the financial statement bases of assets and liabilities and their tax bases, tax losses and credit carryforwards. Components of deferred income taxes are summarized as follows:

 September 30,
 20222021
 (In millions)
Deferred tax assets:  
Inventory costs$74.0 $63.5 
Inventory impairments9.5 12.7 
Warranty and construction defect costs239.5 190.5 
Net operating loss carryforwards44.1 11.7 
Tax credit carryforwards6.4 1.6 
Incentive compensation plans84.7 77.5 
Other12.7 15.6 
Total deferred tax assets470.9 373.1 
Valuation allowance(17.9)(4.2)
Total deferred tax assets, net of valuation allowance453.0 368.9 
Deferred tax liabilities:
Deferral of profit on home closings209.4 166.7 
Depreciation of fixed assets30.5 14.4 
Deferral of income18.5 2.0 
Undistributed earnings of subsidiary27.3 10.2 
Other26.2 20.3 
Total deferred tax liabilities311.9 213.6 
Deferred income taxes, net$141.1 $155.3 

The Company has $30.9 million of tax benefits for a federal net operating loss (NOL) carryforward acquired in the Vidler acquisition. The utilization of the federal NOL is subject to IRC Section 382 limitations; however, it is expected that all of the federal NOL will be utilized within the carryforward period. D.R. Horton has $12.0 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction. Of the total amount, $4.3 million of the tax benefits expire over the next ten years and the remaining $7.7 million expire from fiscal years 2033 to 2042. Forestar has $1.2 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction.

The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company’s consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of the Company’s deferred tax assets.
Valuation Allowance

The Company has a valuation allowance of $17.9 million and $4.2 million at September 30, 2022 and 2021, respectively, related to deferred tax assets for state NOL, state capital loss and tax credit carryforwards that are expected to expire before being realized. Of the $17.9 million valuation allowance, $15.8 million relates to state NOL, state capital loss and tax credit carryforwards acquired in the Vidler acquisition. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to the remaining state NOL, state capital loss and tax credit carryforwards. Any reversal of the valuation allowance in future periods will impact the Company’s effective tax rate.

Unrecognized Tax Benefits

Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return and the benefits recognized in the financial statements. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for fiscal 2022 and 2021 is as follows:

Year Ended September 30,
 20222021
 (In millions)
Unrecognized tax benefits, beginning of year$2.9 $8.9 
Additions attributable to tax positions taken in the current year— 1.5 
Additions attributable to tax positions taken in prior years— — 
Settlements— (7.5)
Unrecognized tax benefits, end of year$2.9 $2.9 

The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $2.9 million. The Company had no accrued interest or penalties related to unrecognized tax benefits at September 30, 2022. The Company classifies interest expense and penalties on income taxes as income tax expense.

Regulations and Legislation

D.R. Horton is subject to federal income tax and state income tax in multiple jurisdictions. The statute of limitations for D.R. Horton’s major tax jurisdictions remains open for examination for fiscal years 2018 through 2022. An audit by the Internal Revenue Service of a federal refund claim related to the retroactive extension of energy efficient homes tax credits for fiscal 2018 and additional energy efficient tax credits for fiscal 2017 was completed during the current fiscal year with no material adjustments. D.R. Horton is under audit by various states; however, the Company is not aware of any significant findings by the state taxing authorities.

Forestar is subject to federal income tax and state income tax in multiple jurisdictions. The statute of limitations for Forestar’s federal income tax remains open for examination for tax years 2019 through 2022. The statute of limitations for Forestar’s major state tax jurisdictions generally remain open for examination for tax years 2017 through 2022. Forestar is not currently under audit for federal or state income taxes.