Income Taxes

The provision for income tax attributable to income before income taxes consisted of (in thousands):



	Year Ended December 31,
	2018			2017		2016
Current:
Federal	$	70,098		$	95,814	$	90,387
State	10,941			8,961		8,744
Total current taxes	81,039			104,775		99,131
Deferred:
Federal	(350		)	37,151		5,749
State	9,863			10,341		1,214
Total deferred taxes	9,513			47,492		6,963
Total income tax expense	$	90,552		$	152,267	$	106,094

The Company’s provision for income taxes was different from the amount computed by applying the statutory federal income tax rate of 21% to the underlying income before income taxes as a result of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
Taxes at the U.S. federal statutory rate	$	76,009		$	118,936		$	105,779
State income taxes, net of federal tax impact	13,603			10,712			9,539
Domestic production activities deduction	—			(7,108		)	(5,037		)
Non-deductible transaction costs	234			541			305
Change in valuation allowance	—			3,256			(4,038		)
Tax Cuts and Jobs Act	(740		)	21,961			—
Other, net	1,446			3,969			(454		)
Total income tax expense	$	90,552		$	152,267		$	106,094
Effective income tax rate	25.0		%	44.8		%	35.1		%

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis, and for operating loss and tax credit carryforwards. Deferred taxes consisted of the following at December 31, 2018 and 2017 (in thousands):



	Year Ended December 31,
	2018			2017
Deferred tax assets:
Impairment and other valuation reserves	$	37,573		$	40,438
Incentive compensation	5,946			5,851
Indirect costs capitalized	20,348			19,574
Net operating loss carryforwards (state)	18,702			25,172
State taxes	2,275			2,181
Other costs and expenses	10,848			11,354
Gross deferred tax assets	95,692			104,570
Valuation allowance	(3,449		)	(3,478		)
Deferred tax assets, net of valuation allowance	92,243			101,092
Deferred tax liabilities:
Interest capitalized	(7,355		)	(7,144		)
Basis difference in inventory	(8,170		)	(9,207		)
Fixed assets	(2,473		)	(1,710		)
Intangibles	(5,187		)	(5,360		)
Deferred financing costs	(802		)	(898		)
Other	(488		)	(360		)
Deferred tax liabilities	(24,475		)	(24,679		)
Net deferred tax assets	$	67,768		$	76,413

On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was enacted, reducing the U.S. federal corporate income tax rate from 35% to 21%, among other changes. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. At December 31, 2017, we had not completed our accounting for all the enactment-date income tax effects of the Act under ASC 740, Income tax for the remeasurement of deferred tax assets and liabilities and the grandfathering provisions related to performance - based executive compensation.

At December 31, 2018, we have now completed our accounting for all of the enactment-date income tax effects of the Act. In the quarter ended December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21%) by recording a provisional amount of $22.0 million. Upon further analysis of certain aspects of the Act and refinement of our calculations during the year ended December 31, 2018, the Company recorded a benefit of $740,000 due to favorable provision to return adjustments upon filing of the federal consolidated return.

The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates for the years in which taxes are expected to be paid or recovered. Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable. Our assessment considers, among other things, the nature, frequency and severity of our current and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods and tax planning alternatives.

As of December 31, 2018, the Company had a state net operating loss carryforward of $283.3 million, which will expire between 2028 and 2036. As of December 31, 2018 and 2017, we had a valuation allowance on our deferred tax assets of $3.4 million and $3.5 million, respectively. Our valuation allowance increased in 2017 due to a $13.2 million impairment of our investment in a limited liability company joint venture for the entitlement and development of land located in a Los Angeles County, California that was recorded in the fourth quarter of 2017. A valuation allowance was recorded against the deferred tax asset related to this impairment due to the fact that the joint venture if disposed at its carrying value would result in a capital loss, the realization of which is uncertain.

The Company will continue to evaluate both positive and negative evidence in determining the need for a valuation allowance against its deferred tax assets. Changes in positive and negative evidence, including differences between the Company’s future operating results and the estimates utilized in the determination of the valuation allowance, could result in changes in the Company’s estimate of the valuation allowance against its deferred tax assets. 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 allowance against the Company’s deferred tax assets.

Unrecognized tax benefits represent potential future obligations to taxing authorities if uncertain tax positions we have taken on previously filed tax returns are not sustained. These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were not sustained, such as federal deduction that could be realized if an unrecognized state deduction was not sustained.

The Company files income tax returns in the U.S., including federal and multiple state and local jurisdictions. The Company’s tax years 2015-2017 will remain open to examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss or credit carryforwards.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in thousands):



	Year Ended December 31,
	2018			2017
Balance at beginning of year	$	1,521		$	—
Increase (decrease) related to prior year tax positions	(507		)	1,521
Balance at end of year	$	1,014		$	1,521

The Company classifies interest and penalties related to income taxes as part of income tax expense. The Company has not recorded any tax expense for interest and penalties on uncertain tax positions during the years ended December 31, 2018, 2017 and 2016. The Company estimates that the uncertain tax positions, if reversed, would result in a tax benefit of approximately $972,000.