Income Taxes
The provision for income taxes consists of the following components:
|
| | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal taxes | $ | 3,443 |
| | $ | (9,338 | ) | | $ | 18,055 |
|
State taxes | 1,556 |
| | (403 | ) | | 1,887 |
|
Foreign taxes | 498 |
| | 374 |
| | 262 |
|
Total current taxes | 5,497 |
| | (9,367 | ) | | 20,204 |
|
Deferred: | | | | | |
Federal taxes | $ | 824 |
| | $ | 10,474 |
| | $ | (9,804 | ) |
State taxes | (879 | ) | | (100 | ) | | (1,771 | ) |
Foreign taxes | (74 | ) | | (344 | ) | | (297 | ) |
Total deferred taxes | (129 | ) | | 10,030 |
| | (11,872 | ) |
Provision for income taxes | $ | 5,368 |
| | $ | 663 |
| | $ | 8,332 |
|
The provision for income taxes differs from the amount computed at the federal statutory rate as follows:
|
| | | | | | | | |
| Fiscal Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal income tax statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase (decrease) resulting from: | | | | | |
Research and development tax credits | (12.5 | ) | | (23.4 | ) | | (4.4 | ) |
Qualified production activities income deduction | (3.2 | ) | | — |
| | (5.4 | ) |
Foreign rate differential | (1.7 | ) | | (10.2 | ) | | (1.6 | ) |
Net operating loss carryback | — |
| | 9.1 |
| | — |
|
Other non-recurring adjustments for state taxes | — |
| | — |
| | (1.8 | ) |
Meals and entertainment | 0.8 |
| | 3.7 |
| | 0.8 |
|
Stock option deduction | 0.8 |
| | 3.7 |
| | 0.6 |
|
State income taxes, net of federal benefit | 1.4 |
| | (5.2 | ) | | 2.0 |
|
Acquisition expenses | 5.7 |
| | (3.6 | ) | | — |
|
Other | (3.6 | ) | | 1.4 |
| | (1.8 | ) |
Effective income tax rate | 22.7 | % | | 10.5 | % | | 23.4 | % |
The net deferred tax assets and liabilities in the accompanying consolidated balance sheets consist of the following:
|
| | | | | | | |
| March 31,
2017 | | March 31,
2016 |
Deferred tax assets: | | | |
Net operating losses | $ | 11,811 |
| | $ | 17,920 |
|
Deferred revenue | 7,337 |
| | 10,682 |
|
Accrued compensation and benefits | 7,063 |
| | 5,868 |
|
Deferred rent | 5,446 |
| | 2,760 |
|
Research and development credit | 4,328 |
| | 3,611 |
|
Compensatory stock option expense | 4,028 |
| | 2,664 |
|
Allowance for doubtful accounts | 3,974 |
| | 4,176 |
|
Deferred compensation | 2,642 |
| | 2,586 |
|
Foreign deferred taxes | 1,173 |
| | 1,098 |
|
State income taxes | 329 |
| | 445 |
|
Inventory valuation | 232 |
| | 68 |
|
Other | 169 |
| | 265 |
|
Total deferred tax assets | 48,532 |
| | 52,143 |
|
Deferred tax liabilities: | | | |
Intangible assets | $ | (18,038 | ) | | $ | (22,972 | ) |
Capitalized software costs | (7,494 | ) | | (9,644 | ) |
Accounts receivable | (5,538 | ) | | (5,096 | ) |
Accelerated depreciation | (2,348 | ) | | (2,434 | ) |
Prepaid expenses | (1,776 | ) | | (1,249 | ) |
Total deferred tax liabilities | (35,194 | ) | | (41,395 | ) |
Valuation allowance | (2,073 | ) | | (2,551 | ) |
Deferred tax assets, net | $ | 11,265 |
| | $ | 8,198 |
|
The deferred tax assets and liabilities have been shown net in the accompanying consolidated balance sheets as noncurrent.
As of March 31, 2017 and March 31, 2016, we had federal net operating loss (“NOL”) carryforwards of $31,032 and $45,202, respectively. The federal NOL carryforwards were inherited in connection with our acquisition of HealthFusion in January 2016 and Gennius in March 2015. The NOL carryforwards expire in various amounts starting on 2029 for both federal and state tax purposes. As of March 31, 2017, we had state NOL carryforwards of approximately $950, related to the HealthFusion acquisition state NOL tax attribute. The utilization of the federal NOL carryforwards is subject to limitations under the rules regarding changes in stock ownership as determined by the Internal Revenue Code.
As of March 31, 2017 and March 31, 2016, the research and development tax credit carryforward available to offset future federal and state taxes was $4,328 and $3,611 respectively. The credits expire in various amounts starting in 2019.
We expect to receive the full benefit of the deferred tax assets recorded with the exception of certain state credits and state NOL carryforwards for which we have recorded a valuation allowance.
We have not recorded any U.S. income tax or foreign withholding tax on the earnings of our India foreign subsidiary as these amounts are intended to be indefinitely reinvested. As of March 31, 2017, the cumulative amount of undistributed earnings of our foreign subsidiary was $7,555. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding tax is not practicable because of the complexities associated with its hypothetical calculation.
Uncertain tax positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits, which is recorded within other noncurrent liabilities in our consolidated balance sheet, is as follows:
|
| | | |
Balance as of March 31, 2015 | $ | 3,763 |
|
Additions for prior year tax positions | 235 |
|
Reductions for prior year tax positions | (43 | ) |
Balance as of March 31, 2016 | $ | 3,955 |
|
Additions for prior year tax positions | 920 |
|
Additions for current year tax positions | 139 |
|
Reductions for prior year tax positions | (252 | ) |
Balance as of March 31, 2017 | $ | 4,762 |
|
During the year ended March 31, 2017, we recorded additional net liabilities of $668 mostly related to various state tax planning benefits recorded in the current year for prior year tax positions. The total amount of unrecognized tax benefit that, if recognized, would decrease the income tax provision is $4,762.
Our practice is to recognize interest related to income tax matters as interest expense in the consolidated statements of net income and comprehensive income. We had approximately $297 and $129 of accrued interest related to income tax matters as of March 31, 2017 and 2016, respectively. We recognized $170 and $57 of interest related to income tax matters in the consolidated statements of net income and comprehensive income in the years ended March 31, 2017 and 2016, respectively, and $309 in the year ended March 31, 2015. No penalties related to income tax matters were accrued or recognized in our consolidated financial statements for all periods presented.
We are no longer subject to U.S. federal income tax examinations for tax years before fiscal years ended 2014. With a few exceptions, we are no longer subject to state or local income tax examinations for tax years before fiscal years ended 2013. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations within the next twelve months.