|12 Months Ended|
Dec. 31, 2016
12. INCOME TAXES
As noted in Note 1 – Summary of Significant Accounting Policies, we early adopted ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting.” As a result, a tax benefit of $0.6 million related to share-based compensation was recognized in income tax expense for 2016.
At December 31, 2016 the net deferred tax liability of $174.2 million consisted of net long-term deferred tax assets of $19.5 million and net long-term deferred tax liabilities of $193.7 million. At December 31, 2015 the net deferred tax liability of $160.7 million consisted of net long-term deferred tax assets of $20.6 million and net long-term deferred tax liabilities of $181.3 million. For 2016, for the purpose of this footnote, we have changed the presentation of the deferred assets and deferred liabilities to show the State deferreds net of Federal benefit. For 2015 and prior years the Federal benefit of State deferred assets and liabilities were shown net in the Other category of deferred tax liabilities. For most categories the change in presentation is not material. However, the change in presentation in the net operating loss carry forward is significant as all are related to State net operating losses. The 2016 deferred tax asset related to the net operating loss carryforward is $27.6 million before the Federal benefit of State tax deduction is taken into account.
The deferred portion of state and local taxes includes a $(0.8) million, $(33.7) million, and $(2.0) million tax benefit resulting from a change in the valuation allowance against state and local deferred tax assets in the years ending December 31, 2016, 2015, and 2014, respectively. As of December 31, 2016 there are no remaining valuation allowances in place.
Accounting guidance for income taxes requires that future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, future reversals of existing taxable temporary differences recorded as a deferred tax liability, tax‑planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period, and projected future taxable income.
If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) such deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company’s three‑year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable. Accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of deferred tax assets.
In a prior period, we had recorded a valuation allowance against certain state deferred tax assets as a non‑cash charge to income tax expense. In reaching this conclusion, we considered the significant decline in residential new construction, high level of foreclosure activity, and the slower than anticipated recovery in the U.S. housing market which led to U.S. operating losses, causing us to be in a three‑year cumulative U.S. loss position.
During the years ended December, 31, 2010, 2011, and 2012, objective and verifiable negative evidence, such as continued U.S. operating losses and significant impairment charges for U.S. goodwill in 2010, continued to outweigh positive evidence necessary to reduce the valuation allowance. As a result, we recorded increases in the valuation allowance against our U.S. Federal and certain state deferred tax assets as a non‑cash charge to income tax expense during the years ended December 31, 2010, 2011, and 2012.
A return to sustainable profitability in the U.S. is required before we would change our judgment regarding the need for a valuation allowance against our deferred tax assets.
Although strengthening residential new construction activity resulted in profitability for our operations in 2013 and 2014, we continued to record a full valuation allowance against the U.S. Federal and certain state deferred tax assets. We arrived at this conclusion due to the Company’s (i) low amount of profit in 2013 and 2014, (ii) continued three‑year cumulative loss position through the year ended December 31, 2014, and (iii) lack of taxable income after evaluating the sources of income generally allowed under ASC 740 in determining whether or not a deferred asset may be realized.
In the fourth quarter of 2015 we recorded a $35.5 million tax benefit ($13.5 million of Federal and $22.0 million of state and local net of federal benefit) from the release of the valuation allowance against its U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the Company’s strong results in the third and fourth quarters reflecting (i) continued improvement in both new home construction and repair/remodel activity in the U.S. and (ii) the Company’s ability to function as a standalone business. We also considered our progress on strategic initiatives to reduce costs and expand the breadth of our market positions, which contributed to the continued improvement in our operations over the past few years.
In the fourth quarter of 2016 we recorded a $0.8 million tax benefit from the release of the valuation allowance against certain state deferred tax assets (primarily State net operating losses) due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the Company’s strong results though out the 2016 year reflecting (i) continued improvement in both new home construction and repair/remodel activity in the U.S. and (ii) the Company’s ability to function as a standalone business. We also considered our continued progress on strategic initiatives to reduce costs and expand the breadth of our market positions, which contributed to the continued improvement in our operations over the past few years. This was the Company’s last remaining valuation allowance.
For activity through the first six months of 2015 we filed tax returns as a member of the Masco consolidated group for federal and certain state jurisdictions. As a result, certain tax attributes, primarily the net operating loss carryforward, are treated as an asset of the Masco group and may be utilized by the Masco group through the end of December 31, 2015, Masco’s tax year-end. All of our U.S. Federal net operating loss carryforward and certain state net operating loss carryforwards were utilized by the Masco consolidated group. In accordance, as of December 31, 2015, the deferred tax assets relating to the net operating loss carryforwards for federal and certain state jurisdictions were transferred to Masco in the amount of $401 million, with a similar transfer of the related valuation allowance.
Due to the fact that TopBuild’s current income tax expense is based on a full year, notwithstanding that it was a member of Masco’s consolidated group through June 30, 2015, an adjustment of $2.6 million was required to be made to equity to record the appropriate current income tax payable on a standalone basis.
Of the deferred tax asset related to the net operating loss at December 31, 2016, $18.0 million will expire between 2021 and 2036. Of the deferred tax asset related to the net operating loss at December 31, 2015, $31.2 million will expire between 2020 and 2035.
A reconciliation of the U.S. Federal statutory tax rate to the income tax expense (benefit) on income from continuing operations was as follows:
The reduction in the valuation allowance resulted in a negative effective tax rate for 2015.
Income taxes paid were $39.5 million, $21.0 million, and $1.1 million during the years ended December 31, 2016, 2015, and 2014, respectively. The Domestic Production Activities Deduction, under IRC §199, became a material factor in the company’s effective tax rate for 2016. The company’s lower taxable income limited the Domestic Production Activities Deduction for the years ended December 31, 2015 and 2014.
We file income tax returns in the U.S. Federal jurisdiction and various state and local jurisdictions. For periods prior to the Separation we, as a member of the Masco consolidated group, participated in the Compliance Assurance Program (“CAP”). CAP is a real-time audit of the U.S. Federal income tax return that allows the Internal Revenue Service (“IRS”), working in conjunction with Masco, to determine tax return compliance with the U.S. Federal tax law prior to filing the return. This program provided us with greater certainty about our tax liability for a given year within months, rather than years, of filing the annual tax return and greatly reduced the need for recording a liability for U.S. Federal uncertain tax positions. The IRS has completed their examination of the Masco consolidated U.S. Federal tax return in which we were included through the year ended December 31, 2015. With few exceptions, we are no longer subject to state income tax examinations on filed returns for years before 2011.
At December 31, 2016, there are no liabilities related to uncertain tax positions. We have not incurred any interest related to the underpayment of income taxes or penalties related to tax positions not meeting the minimum statutory threshold to avoid payment of penalties in the year ended December 31, 2016.
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.
Reference 1: http://www.xbrl.org/2003/role/presentationRef