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Income Taxes | 12 Months Ended
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Dec. 31, 2017
Income Tax Disclosure [Abstract] |
Income taxes | Income taxes On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, the following that impact us: (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (3) creating a new limitation on deductible interest expense; (4) repealing the domestic production activities deduction; (5) limiting the deductibility of certain executive compensation; and (6) limiting certain other deductions. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting relating to the Tax Act under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. In connection with our initial analysis of the impact of the Tax Act, we have recorded a provisional amount of net tax expense of $172.1 million in the year ended December 31, 2017 related to the remeasurement of our deferred tax balance and other effects. For various reasons including those discussed below, we have not fully completed our accounting for the income tax effects of the Tax Act. As we were able to make reasonable estimates of the effects of the Tax Act, we recorded provisional amounts. In connection with the adoption of the Tax Act, we:
– | Remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally at a federal rate of 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Our financial statements include provisional amounts for the impacts of deferred tax revaluation.
– | Evaluated the future deductibility of executive compensation due to the elimination of the performance-based exception as well as the modification of who is treated as a covered person in connection with limiting the deduction. As part of the Tax Act, there is a transition rule for written, binding contracts in place prior to November 2, 2017 related to executive compensation, that have not been modified in any material respect. Further guidance is needed to fully determine the impact of these provisions. Our financial statements include provisional amounts for the impacts of the changes to the deductibility of executive compensation.
– | Performed initial evaluations of the state conformity to the Tax Act. We continue to assess the conformity of each state in which we operate to the Tax Act along with the changes in deductibility of certain expenses at the federal level in order to finalize the impacts on the realizability of our state net NOLs and our related valuation allowances. Our financial statements include provisional amounts for the impacts of state conformity.
Components of current and deferred income tax expense (benefit) are as follows ($000’s omitted):
| 2017 |  | 2016 |  | 2015
Current expense (benefit) |  |  |  |  |
Federal | $ | 81,101 |  |  | $ | 9,464 |  |  | $ | 8,760 |
State and other | (11,801 | ) |  | (13,104 | ) |  | 1,474 |
| $ | 69,300 |  |  | $ | (3,640 | ) |  | $ | 10,234 |
Deferred expense (benefit) |  |  |  |  |
Federal | $ | 444,695 |  |  | $ | 312,288 |  |  | $ | 277,895 |
State and other | (22,388 | ) |  | 22,499 |  |  | 33,804 |
| $ | 422,307 |  |  | $ | 334,787 |  |  | $ | 311,699 |
Income tax expense (benefit) | $ | 491,607 |  |  | $ | 331,147 |  |  | $ | 321,933 |
The deferred tax expense associated with the remeasurement of the state NOL carryforwards and related valuation allowances as well as other deferred tax assets are net of federal benefit and included in state deferred tax expense. The following table reconciles the statutory federal income tax rate to the effective income tax rate:
| 2017 |  | 2016 |  | 2015
Income taxes at federal statutory rate | 35.0 | % |  | 35.0 | % |  | 35.0 | %
State and local income taxes, net of federal tax | 3.1 |  |  | 3.3 |  |  | 2.8 |
Changes in tax laws, including the Tax Act | 18.3 |  |  | 0.5 |  |  | 0.3 |
Deferred tax asset valuation allowance | (1.1 | ) |  | (2.2 | ) |  | 0.4 |
Tax contingencies | (1.0 | ) |  | (1.3 | ) |  | 0.1 |
Other | (1.9 | ) |  | 0.2 |  |  | 0.9 |
Effective rate | 52.4 | % |  | 35.5 | % |  | 39.5 | %
Our effective tax rate was 52.4%, 35.5% and 39.5% for 2017, 2016, and 2015, respectively. The 2017 effective tax rate differs from the federal statutory rate primarily due to the impacts of the Tax Act, state income tax expense on current year earnings, the favorable resolution of certain state income tax matters, the domestic production activities deduction, and state tax law changes. The 2016 effective tax rate exceeds the federal statutory rate primarily due to state income taxes, the reversal of a portion of our valuation allowance related to a legal entity restructuring, the favorable resolution of certain state income tax matters, the impact on our net deferred tax assets due to changes in business operations and state tax laws, and recognition of energy efficient home credits. The 2015 effective tax rate exceeds the federal statutory rate primarily due to state income taxes and the impact of changes in business operations and state tax laws to our net deferred tax assets. As a result of the adoption of ASU No. 2016-09 (see Note 1), excess tax benefits related to equity compensation are recorded as a component of income tax expense. Additionally, we recorded a cumulative-effect adjustment to increase retained earnings and deferred tax assets as of January 1, 2017 by $18.6 million for previously unrecognized excess tax benefits. 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,
| 2017 |  | 2016
Deferred tax assets: |  |  |
Accrued insurance | $ | 117,133 |  |  | $ | 220,823 |
Inventory valuation reserves | 202,791 |  |  | 359,964 |
Other reserves | 78,271 |  |  | 132,597 |
NOL carryforwards: |  |  |
Federal | 41,282 |  |  | 187,817 |
State | 248,224 |  |  | 224,316 |
Alternative minimum tax credit carryforwards | 54,965 |  |  | 53,917 |
Energy and other credit carryforwards | 41,763 |  |  | 45,673 |
| 784,429 |  |  | 1,225,107 |
Deferred tax liabilities: |  |  |
Capitalized items, including real estate basis differences, deducted for tax, net | (17,895 | ) |  | (13,054 | )
Deferral of profit on home sales | (34,769 | ) |  | (69,391 | )
Intangibles | (17,860 | ) |  | (28,391 | )
| (70,524 | ) |  | (110,836 | )
Valuation allowance | (68,610 | ) |  | (64,863 | )
Net deferred tax asset | $ | 645,295 |  |  | $ | 1,049,408 |
Our federal NOL carryforward deferred tax asset of $41.3 million expires, if unused, between 2031 and 2032. We also have state NOLs in various jurisdictions which may generally be carried forward from 5 to 20 years, depending on the jurisdiction. Our NOL carryforward deferred tax assets will expire if unused at various dates as follows: $26.9 million from 2018 to 2022 and $221.3 million from 2023 and thereafter. In addition, we have federal energy credit carryforwards that expire, if unused, between 2027 and 2036, and alternative minimum tax credits that, if unused in 2018, can be refunded beginning in 2019. 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. Our ability to use certain of Centex’s federal losses and credits is limited by Section 382 of the Internal Revenue Code. We do not believe that this limitation will prevent us from utilizing these Centex losses and credits. We do believe that full utilization of certain state NOL carryforwards will be limited due to Section 382. 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 $48.6 million and $21.5 million of gross unrecognized tax benefits at December 31, 2017 and 2016, respectively. If recognized, $23.4 million and $14.0 million, respectively, of these amounts would impact our effective tax rate. Additionally, we had accrued interest and penalties of $4.9 million and $12.2 million at December 31, 2017 and 2016, respectively. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $40.0 million, excluding interest and penalties, primarily due to potential settlements. A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted):
| 2017 |  | 2016 |  | 2015
Unrecognized tax benefits, beginning of period | $ | 21,502 |  |  | $ | 38,992 |  |  | $ | 32,911 |
Increases related to tax positions taken during a prior period | 20,555 |  |  | 224 |  |  | 5,763 |
Decreases related to tax positions taken during a prior period | (9,665 | ) |  | (13,218 | ) |  | — |
Increases related to tax positions taken during the current period | 18,895 |  |  | 114 |  |  | 318 |
Decreases related to settlements with taxing authorities | — |  |  | (707 | ) |  | — |
Reductions as a result of a lapse of the applicable statute of limitations | (2,683 | ) |  | (3,903 | ) |  | — |
Unrecognized tax benefits, end of period | $ | 48,604 |  |  | $ | 21,502 |  |  | $ | 38,992 |
We continue to participate in the Compliance Assurance Process (“CAP”) with the IRS as an alternative to the traditional IRS examination process. As a result of our participation in CAP, federal tax years 2015 and prior are closed. Tax year 2016 is expected to close by the second quarter of 2018. We are also currently under examination by various state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The final outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2005 to 2017.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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