Income taxes
The Income tax provision consisted of the following:
|
| | | | | | | | | | | | |
| | Year ended January 31, | |
(in thousands) | | 2018 |
| | 2017 |
| | 2016 |
|
Current: | |
| |
| |
|
Federal | | $ | 392 |
| | $ | 14,848 |
| | $ | 9,876 |
|
State | | 130 |
| | 1,823 |
| | 1,226 |
|
Total current tax provision | | $ | 522 |
| | $ | 16,671 |
| | $ | 11,102 |
|
Deferred: | |
| |
| |
|
Federal | | $ | 4,068 |
| | $ | (2,308 | ) | | $ | (1,772 | ) |
State | | 237 |
| | (619 | ) | | (389 | ) |
Total deferred tax (benefit) provision | | $ | 4,305 |
| | $ | (2,927 | ) | | $ | (2,161 | ) |
Total income tax provision | | $ | 4,827 |
| | $ | 13,744 |
| | $ | 8,941 |
|
Total income tax provision differed from the amounts computed by applying the U.S. federal statutory income tax rate of 34% to income before income tax provision as a result of the following:
|
| | | | | | | | | | | | |
|
| Year ended January 31, | |
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2016 |
|
Federal income tax provision at the statutory rate |
| $ | 17,744 |
|
| $ | 13,641 |
|
| $ | 8,688 |
|
State income tax provision, net of federal tax benefit |
| 1,241 |
|
| 742 |
|
| 541 |
|
Non-deductible or non-taxable items |
| 143 |
|
| 87 |
|
| 56 |
|
Excess tax benefits on stock-based compensation expense, net |
| (14,136 | ) |
| — |
|
| — |
|
Federal research and development credit |
| (729 | ) |
| (907 | ) |
| (371 | ) |
Deferred tax rate adjustment due to tax reform |
| 458 |
|
| — |
|
| — |
|
Current statutory rate differential due to tax reform |
| (308 | ) |
| — |
|
| — |
|
Change in uncertain tax position reserves, net of indirect benefits |
| 191 |
|
| 246 |
|
| 96 |
|
Other items, net |
| 223 |
|
| (65 | ) |
| (69 | ) |
Total income tax provision |
| $ | 4,827 |
|
| $ | 13,744 |
|
| $ | 8,941 |
|
The Company's effective income tax rate for the years ended January 31, 2018, 2017 and 2016 was 9.2%, 34.3%, and 35.0%, respectively. The difference between the effective income tax rate and the U.S. federal statutory income tax rate each period is impacted by a number of factors, including the relative mix of earnings among state jurisdictions, credits, excess tax benefits or shortfalls on stock-based compensation expense due to the adoption of ASU 2016-09, and other discrete items. The decrease in the effective tax rate for the year ended January 31, 2018 compared to the year ended January 31, 2017 was primarily the result of excess tax benefits on stock-based compensation expense. The decrease in the effective tax rate for the year ended January 31, 2017 compared to the year ended January 31, 2016 was primarily the result of an increase in research and development credits.
The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, includes a reduction of the statutory corporate income tax rate from a top rate of 35% to 21% effective January 1, 2018. The Company is subject to federal and state income taxes in the United States based on a calendar year which differs from its January fiscal year-end for financial reporting purposes. For purposes of reconciling the total income tax provision for the fiscal year, the Company applied a federal statutory rate of 34% for the entire fiscal year as this is the rate that applies for the tax year ending December 31, 2017 which comprises 11 months of the fiscal year. Because a 21% federal statutory rate applies for the one month ending January 31, 2018, a reconciling item has been included in the tax rate reconciliation table above to adjust for the statutory rate reduction that applies to this one-month period. This resulted in a reduction to the income tax provision of $308,000.
Given the significance of the Tax Cuts and Jobs Act, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 (“SAB 118”), which allows registrants to record provisional amounts during a one-year “measurement period” from the date of enactment date of the Tax Cuts and Jobs Act. The measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act.
The Company remeasured certain deferred tax assets and liabilities as of December 31, 2017 based on rates at which they are expected to reverse in the future, which is generally the new corporate income tax rate of 21% as enacted by the Tax Cuts and Jobs Act. However, the Company's analysis is incomplete as we are still analyzing certain aspects of the Act and refining our calculations, including state conformity and the impact of state tax rates on deferred tax balances, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Based on the best information available, the provisional amount recorded related to the remeasurement of the Company's deferred tax balance resulted in a decrease in net deferred tax assets of $458,000, with a corresponding increase to the income tax provision during the year ending January 31, 2018. The Company will continue to make and refine its calculations as additional analysis is completed. In addition, the Company's estimates may also be affected as it gains a more thorough understanding of the enacted tax law changes and as additional future guidance on the effects of the Tax Cuts and Jobs Act is made available.
Other significant provisions of the Tax Cuts and Jobs Act are effective as of January 1, 2018, including, but not limited to: the limitation on the current deductibility of net interest expense in excess of 30% of adjusted taxable income, changes in the deductibility of certain meals and entertainment business expenses, and changes in the deductibility of certain excessive employee remuneration. The Company has applied these provisions to its current income tax provision as it relates to its tax return period beginning January 1, 2018 using reasonable interpretations and available guidance. Further guidance or technical corrections may affect the Company's estimates and the application of these provisions on its income tax provision.
Deferred tax assets and liabilities consisted of the following:
|
| | | | | | | | |
(in thousands) |
| January 31, 2018 |
|
| January 31, 2017 |
|
Deferred tax assets: |
|
|
|
|
Accrued bonuses |
| $ | 489 |
|
| $ | 499 |
|
Other accrued liabilities |
| 572 |
|
| 559 |
|
Deferred rent |
| 520 |
|
| 364 |
|
Stock compensation |
| 5,316 |
|
| 5,061 |
|
Net operating loss carryforward |
| 666 |
|
| 84 |
|
Research and development credits |
| 2,882 |
|
| 2,225 |
|
AMT credits |
| 857 |
|
| 548 |
|
Other, net |
| 286 |
|
| 449 |
|
Total gross deferred tax assets |
| $ | 11,588 |
|
| $ | 9,789 |
|
Deferred tax liabilities: |
|
|
|
|
Fixed assets: depreciation and gain/loss |
| $ | (1,170 | ) |
| $ | (902 | ) |
Intangibles: amortization |
| (4,830 | ) |
| (7,252 | ) |
Other, net |
| (127 | ) |
| (57 | ) |
Total gross deferred tax liability |
| (6,127 | ) |
| (8,211 | ) |
Net deferred tax asset |
| $ | 5,461 |
|
| $ | 1,578 |
|
Management considered whether it is more likely than not that some portion or all of the deferred tax assets would 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 considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment and determined that based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that the Company will be able to realize its deferred tax assets. Therefore, no valuation allowance was required as of January 31, 2018.
As of January 31, 2018, the Company had recorded gross federal and state net operating loss carryforwards of $2.6 million and $2.1 million, respectively, which begin to expire at various intervals between tax years ending December 31, 2025 and December 31, 2036. As of January 31, 2018, the Company also had federal and state research and development carryforwards of $2.6 million and $1.5 million, respectively, which expire beginning with the tax year ending December 31, 2019 and 2024, respectively, and federal and state alternative minimum tax credit carryforwards of $856,000 and $2,000, respectively. The state AMT credits do not expire. As a result of the Tax Cuts and Jobs Act, the federal alternative minimum tax was repealed. A provision was enacted which allows the Company to utilize or refund 100% of the remaining AMT credits no later than its tax year beginning in 2021. The Company expects to utilize its AMT credits against income tax in future periods; as a result, the credits have remained classified as deferred tax assets as of January 31, 2018.
As of January 31, 2018 and 2017, the gross unrecognized tax benefit was $889,000 and $674,000, respectively. If recognized, $811,000 and $572,000 of the total unrecognized tax benefits would affect the Company's effective tax rate as of January 31, 2018 and 2017, respectively. Total gross unrecognized tax benefits increased by $215,000 in the period from January 31, 2017 to January 31, 2018. A tabular reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
|
| | | | | | | | |
(in thousands) |
| January 31, 2018 |
|
| January 31, 2017 |
|
Gross unrecognized tax benefits at beginning of year |
| $ | 674 |
|
| $ | 393 |
|
Gross amounts of increases and decreases: |
|
|
|
|
|
|
Increases as a result of tax positions taken during a prior period |
| — |
|
| — |
|
Decreases as a result of tax positions taken during a prior period |
| — |
|
| — |
|
Increases as a result of tax positions taken during the current period |
| 215 |
|
| 281 |
|
Decreases as a result of tax positions taken during the current period |
| — |
|
| — |
|
Decreases resulting from the lapse of the applicable statute of limitations |
| — |
|
| — |
|
Gross unrecognized tax benefits at end of year |
| $ | 889 |
|
| $ | 674 |
|
Certain unrecognized tax benefits are required to be netted against their related deferred tax assets as a result of Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The resulting unrecognized tax benefit recorded within the Company's consolidated balance sheet excludes the following amounts that have been netted against the related deferred tax assets accordingly:
|
| | | | | | | | |
(in thousands) |
| January 31, 2018 |
|
| January 31, 2017 |
|
Total gross unrecognized tax benefits |
| $ | 889 |
|
| $ | 674 |
|
Amounts netted against related deferred tax assets |
| (889 | ) |
| (674 | ) |
Unrecognized tax benefits recorded on the consolidated balance sheet |
| $ | — |
|
| $ | — |
|
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of other expense in the statement of operations. During the years ended January 31, 2018, 2017, and 2016, respectively, the Company recorded a decrease of $0, $0 and $8,000 in interest and penalties related to unrecognized tax benefits. As of January 31, 2018 and 2017, no accrued interest and penalties were recorded.
The Company files income tax returns with U.S. federal and state taxing jurisdictions and is not currently under examination with any jurisdiction. The Company remains subject to examination by federal and various state taxing jurisdictions for tax years after 2003.