) Income Taxes
Income tax expense consisted of the following:
| Years ended April 30, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current: |
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Federal |
$ | 5,643 | $ | 4,105 | $ | 2,506 | ||||||
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State |
676 | 665 | 501 | |||||||||
| Years ended April 30, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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| 6,319 | 4,770 | 3,007 | ||||||||||
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Deferred: |
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Federal |
558 | (299 | ) | (697 | ) | |||||||
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State |
117 | (13 | ) | (36 | ) | |||||||
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| 675 | (312 | ) | (733 | ) | ||||||||
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| $ | 6,994 | $ | 4,458 | $ | 2,274 | |||||||
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The Company’s actual income tax expense differs from the “expected” income tax expense calculated by applying the Federal statutory rate of 35% for fiscal years 2017, 2016 and 2015, to earnings before income taxes as follows:
| Years ended April 30, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
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Computed “expected” income tax expense |
$ | 7,565 | $ | 5,145 | $ | 3,641 | ||||||
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Increase (decrease) in income taxes resulting from: |
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State income taxes, net of federal income tax effect |
592 | 435 | 269 | |||||||||
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Research and development credits |
(520 | ) | (694 | ) | (516 | ) | ||||||
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Change in valuation allowance for deferred tax assets |
(293 | ) | (2 | ) | (5 | ) | ||||||
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Tax contingencies |
(42 | ) | (13 | ) | (955 | ) | ||||||
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Other, net, including permanent items |
(308 | ) | (413 | ) | (160 | ) | ||||||
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| $ | 6,994 | $ | 4,458 | $ | 2,274 | |||||||
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Our effective income tax rates were 32%, 30% and 22% in 2017, 2016 and 2015, respectively. Our effective income tax rate takes into account the source of taxable income, by state, and available income tax credits. The provision for income taxes in 2015 excludes approximately $420,000 of tax benefits realized from the recognition of stock option deductions, which has been recorded in additional paid-in capital. The provision for income taxes in 2017 and 2016 includes approximately $253,000 and $247,000, respectively, in income tax benefits related to the tax benefits realized from stock option deductions.
The significant components of deferred income tax (benefit) expense attributable to income from continuing operations before income taxes for the years ended April 30, 2017, 2016, and 2015 are as follows:
| Years ended April 30, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
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Deferred tax expense/(benefit) |
$ | 968 | $ | (310 | ) | $ | (728 | ) | ||||
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Decrease in the valuation allowance for deferred tax assets |
(293 | ) | (2 | ) | (5 | ) | ||||||
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| $ | 675 | $ | (312 | ) | $ | (733 | ) | |||||
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at April 30, 2017 and 2016 are presented as follows:
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Accruals and expenses not deducted for tax purposes |
$ | 461 | $ | 1,008 | ||||
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State net operating loss carryforwards |
295 | 333 | ||||||
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Fixed asset basis differences |
1,384 | 1,515 | ||||||
| 2017 | 2017 | |||||||
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Nonqualified stock options |
1,679 | 1,870 | ||||||
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Deferred revenue |
234 | 96 | ||||||
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Total gross deferred tax assets |
4,054 | 4,822 | ||||||
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Less valuation allowance |
166 | 459 | ||||||
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Net deferred tax assets |
3,887 | 4,363 | ||||||
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Deferred tax liabilities: |
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Capitalized computer software development costs |
(3,298 | ) | (3,500 | ) | ||||
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Net gains/losses on trading securities |
(1,019 | ) | (673 | ) | ||||
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Goodwill and intangible assets basis differences |
(939 | ) | (957 | ) | ||||
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Deferred agent commissions |
(625 | ) | (553 | ) | ||||
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Total gross deferred tax liabilities |
(5,881 | ) | (5,682 | ) | ||||
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Net deferred tax liabilities |
$ | (1,994 | ) | $ | (1,319 | ) | ||
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At April 30, 2017, the Company has approximately $9.0 million of various state net operating loss carryforwards which are available to offset future state taxable income, if any, through 2035.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon reversal of deferred tax liabilities and expected future profitability, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances, at April 30, 2017.
The Company applies the accounting provisions which require us to prescribe a recognition threshold and measurement attribution for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return.
As of April 30, 2017, 2016 and 2015, we have recorded approximately $57,000, $101,000, and $115,000, respectively, of unrecognized tax benefits, inclusive of interest and penalties, all of which would impact our effective tax rate if recognized. The liability for unrecognized tax benefits is recorded net of any federal tax benefit that would result from payment. During the year ended April 30, 2015, the Company recognized $973,000 of income tax benefits due to the reversal of a reserve for uncertain tax positions due to the expiration of statutes of limitations.
We recognize potential accrued interest and penalties related to unrecognized tax benefits within income tax expense. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. As of April 30, 2017 and 2016, we had recorded a liability for potential penalties and interest of approximately $24,000 and $47,000, respectively, related to uncertain tax positions.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, excluding interest and penalties (in thousands):
| 2017 | 2016 | |||||||
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Balance at beginning of the period |
$ | 54 | $ | 61 | ||||
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Decreases as a result of positions taken during prior periods |
(25 | ) | (11 | ) | ||||
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Increases as a result of positions taken during the current period |
4 | 4 | ||||||
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Balance at April 30, |
$ | 33 | $ | 54 | ||||
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We conduct business globally and, as a result, file consolidated income tax returns in the United States Federal jurisdiction and in many state and foreign jurisdictions. We are no longer subject to state and local, or non-U.S. income tax examinations for years prior to 2000. We are no longer subject to U.S. Federal income tax examination for years prior to 2011.
During the years ended April 30, 2017 and 2016, we recorded research and development state tax credits against payroll taxes of approximately $436,000 and $1.3 million, respectively, which reduced general and administrative expenses by the same amount.