Income Taxes
Each reporting period, we estimate the likelihood that we will be able to recover our deferred tax assets, which represent timing differences in the recognition of revenue and certain tax deductions for accounting and tax purposes. The realization of deferred tax assets is dependent, in part, upon future taxable income. In assessing the need for a valuation allowance, we consider all available evidence, including our historical profitability and projections of future taxable income. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance. Such valuation allowance is maintained on our deferred tax assets until sufficient positive evidence exists to support its reversal in future periods. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Significant judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets.
During the three months ended March 31, 2016, there were several pieces of negative evidence that contributed to our conclusion that a valuation allowance was appropriate against all deferred tax assets that rely upon future taxable income for their realization. This negative evidence included (1) a significant pre-tax loss during the three months ended March 31, 2016, (2) deterioration in leading indicators, such as applications and new student starts, and projected population during the three months ended March 31, 2016, which negatively impacts projected future operating results, (3) financial projections that indicated we will be in a 3-year cumulative loss position during 2016 and (4) the continued challenging business and regulatory environment facing for-profit education institutions.
As a result of our assessment, our income tax expense was impacted by $34.2 million related to the increase in the valuation allowance within our consolidated statements of loss during the year ended September 30, 2016. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods if estimates of future taxable income during the carryforward period are increased, if objective negative evidence in the form of cumulative losses is no longer present and if additional weight may be given to subjective evidence such as our projections for growth. We will continue to evaluate our valuation allowance in future periods for any change in circumstances that causes a change in judgment about the realizability of the deferred tax assets.
Under Section 382 of the Internal Revenue Code, for income tax purposes only, we underwent an ownership change as a result of the preferred stock issuance in June 2016. Accordingly, certain deductions and losses will be subject to an annual Section 382 limitation for both federal and state tax purposes. The limitation may affect the timing of when these deductions and losses can be used and, in turn, may impact the timing of the payment of income taxes. The limitation may also cause such deductions and losses to expire unused.
The components of income tax expense (benefit) are as follows:
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
2017 | | 2016 | | 2015 |
Current expense (benefit) | | | | | | |
United States federal | | $ | 4,153 |
| | $ | (2,043 | ) | | $ | 2,819 |
|
State | | 1,244 |
| | 285 |
| | 1,043 |
|
Total current expense (benefit) | | 5,397 |
| | (1,758 | ) | | 3,862 |
|
Deferred (benefit) expense | | | | | | |
United States federal | | — |
| | 24,877 |
| | (5,109 | ) |
State | | — |
| | 3,051 |
| | (285 | ) |
Total deferred (benefit) expense | | — |
| | 27,928 |
| | (5,394 | ) |
Total provision (benefit) for income taxes | | $ | 5,397 |
| | $ | 26,170 |
| | $ | (1,532 | ) |
The income tax provision differs from the tax that would result from application of the statutory federal tax rate of 35.0% to pre-tax income for the year. The reasons for the differences are as follows:
|
| | | | | | | | | | | | |
| | Year Ended September 30, |
2017 | | 2016 | | 2015 |
Income tax expense at statutory rate | | $ | (956 | ) | | $ | (7,534 | ) | | $ | (3,738 | ) |
State income taxes, net of federal tax benefit | | 302 |
| | (531 | ) | | 265 |
|
Deferred tax asset write-off related to share based
compensation | | — |
| | 51 |
| | 1,572 |
|
Increase in valuation allowance | | 6,192 |
| | 34,184 |
| | 128 |
|
Other, net | | (141 | ) | | — |
| | 241 |
|
Total income tax expense (benefit) | | $ | 5,397 |
| | $ | 26,170 |
| | $ | (1,532 | ) |
Beginning in December 2013, certain stock-based compensation awards granted to employees expired, which required a write-off of the related deferred tax asset through income tax expense as our pro forma windfall pool of available excess tax benefits was no longer sufficient to absorb the shortfall. As a result of the full valuation allowance recorded on our deferred tax assets during the three months ended March 31, 2016, any write-offs of deferred tax assets related to stock-based compensation will have no impact on income tax expense. In the year ended September 30, 2016, we wrote off $1.8 million of deferred tax assets related to stock-based compensation and reduced the corresponding valuation allowance by the same amount.
The components of the deferred tax assets (liabilities) recorded in the accompanying consolidated balance sheets were as follows:
|
| | | | | | | | |
| | September 30, |
2017 | | 2016 |
Gross deferred tax assets: | | | | |
Deferred compensation | | $ | 1,976 |
| | $ | 2,083 |
|
Reserves and accruals | | 5,017 |
| | 5,417 |
|
Accrued tool sets | | 1,111 |
| | 1,188 |
|
Deferred revenue | | 27,056 |
| | 22,326 |
|
Deferred rent liability | | 455 |
| | 1,213 |
|
Net operating losses and tax credit carryforwards | | 416 |
| | 479 |
|
Depreciation and amortization of property and equipment | | 3,151 |
| | 684 |
|
Charitable contribution carryovers | | 665 |
| | 671 |
|
Deductions limited by Section 382 | | 943 |
| | 592 |
|
Valuation allowance | | (38,407 | ) | | (32,828 | ) |
Total gross deferred tax assets | | 2,383 |
| | 1,825 |
|
Gross deferred tax liabilities: | | | | |
Amortization of goodwill and intangibles | | (3,141 | ) | | (3,141 | ) |
Prepaid and other expenses deductible for tax | | (2,383 | ) | | (1,825 | ) |
Total deferred tax liabilities, gross | | (5,524 | ) | | (4,966 | ) |
Net deferred tax liabilities | | $ | (3,141 | ) | | $ | (3,141 | ) |
The following table summarizes the activity for the valuation allowance for the year ended September 30:
|
| | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Additions (Reductions) to Income Tax Expense | | Write-offs | | Balance at End of Period |
2017 | | $ | 32,828 |
| | $ | 6,192 |
| | $ | (613 | ) | | $ | 38,407 |
|
2016 | | $ | 401 |
| | $ | 34,184 |
| | $ | (1,757 | ) | | $ | 32,828 |
|
2015 | | $ | 273 |
| | $ | 128 |
| | $ | — |
| | $ | 401 |
|
As of September 30, 2017, we had approximately $2.0 million in deferred tax assets related to charitable contribution carryforwards, deductions limited by Section 382, as well as net operating loss and credit carryforwards. These attributes will expire in the years 2018 through 2038.
We file income tax returns for federal purposes and in many states. Our tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three to four years, following the tax year to which these filings relate. Our U.S. federal income tax return for fiscal year 2015 is currently under review by the Internal Revenue Service.