Income Taxes

12 Months Ended

Jun. 30, 2023

Income Taxes

Income Taxes

5. Income Taxes

The provision for income taxes is based on earnings reported in the consolidated financial statements. A deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense or benefit is measured by the change in the deferred income tax asset or liability during the year.

Deferred tax assets and liabilities result primarily from temporary differences in book versus tax basis accounting. Deferred tax assets and liabilities consist of the following:

	June 30,
	2023		2022
	(In thousands)
Deferred tax assets
Net operating loss carryforward	$	17,628	$	19,613
Reserves		7,850		8,306
Accrued expenses		10,868		11,524
Stock compensation expense		4,548		5,166
Other assets		3,212		5,218
Convertible debt		8,632		11,005
Deferred revenue		680		591
Lease liability		17,900		21,680
Total deferred tax assets		71,318		83,103
Deferred tax liabilities
Capitalized curriculum development		(9,038)		(9,269)
Capitalized software and website development costs		(2,987)		(17,789)
Property and equipment		(8,438)		(10,547)
Right-of-use assets		(16,837)		(21,062)
Returned materials		(2,980)		(3,503)
Purchased intangibles		(15,471)		(17,461)
Total deferred tax liabilities		(55,751)		(79,631)
Net deferred tax asset (liability) before valuation allowance		15,567		3,472
Valuation allowance		(6,791)		(6,677)
Net deferred tax asset (liability)	$	8,776	$	(3,205)
Reported as:
Long-term deferred tax assets (liabilities)	$	8,776	$	(3,205)

The Company maintained a valuation allowance on net noncurrent deferred tax assets of $6.8 million and $6.7 million as of June 30, 2023 and 2022, respectively, predominantly related to foreign income tax net operating losses ("NOL").

At June 30, 2023, the Company had approximately $44.3 million of available federal NOL carryforwards solely related to the acquisition of Galvanize in January 2020.  The available federal NOL carryforwards were generated after 2017 and have an indefinite carryforward period due to the Tax Cuts and Jobs Act (the “Tax Act”).  Section 382 of the Internal Revenue Code limits the utilization of NOL carryforwards following a change of control.  The Company has performed an analysis of the Section 382 ownership changes and have determined that it will be able to fully utilize its available NOLs subject to the Section 382 limitation.

At June 30, 2023, the Company had tax effected state NOL carryforwards of $1.4 million, net of valuation allowances, and will expire on various dates.

The components of the income before income taxes for the years ended June 30, 2023, 2022 and 2021 were as follows:

	Year Ended June 30,
	2023		2022		2021
	(In thousands)
Domestic	$	161,270	$	131,967	$	81,068
Foreign		10,943		15,251		14,922
Total income before income taxes	$	172,213	$	147,218	$	95,990

The components of the income tax expense (benefit) for the years ended June 30, 2023, 2022 and 2021 were as follows:

	Year Ended June 30,
	2023		2022		2021
	(In thousands)
Current:
Federal	$	41,360	$	27,969	$	12,290
State		12,032		7,550		6,643
Foreign		2,327		3,379		3,057
Total current		55,719		38,898		21,990
Deferred:
Federal		(9,033)		1,743		2,287
State		(1,340)		(553)		262
Total deferred		(10,373)		1,190		2,549
Total income tax expense (benefit)	$	45,346	$	40,088	$	24,539

The provision for (benefit from) income taxes can be reconciled to the income tax that would result from applying the statutory rate to the net income before income taxes as follows:

	Year Ended June 30,
	2023		2022		2021
U.S. federal tax at statutory rates	21.0	%	21.0	%	21.0	%
Permanent items	-		0.4		(0.4)
Lobbying	0.1		0.1		0.2
Non-deductible compensation	1.6		9.3		4.9
State taxes, net of federal benefit	4.4		3.5		5.8
Research and development tax credits	(1.4)		(0.8)		(0.9)
Change in valuation allowance	(0.4)		0.8		(0.1)
Effects of foreign operations	0.9		0.3		0.4
Reserve for unrecognized tax benefits	0.9		0.5		0.2
Other	(0.5)		(1.2)		(0.5)
Stock-based compensation	(0.3)		(6.7)		(5.0)
Provision for (benefit from) income taxes	26.3	%	27.2	%	25.6	%

The decrease in the effective income tax rate for the year ended June 30, 2023, as compared to the effective tax rate for the year ended June 30, 2022, was primarily due to the decrease in the amount of non-deductible compensation, which was partially offset by the decrease in excess tax benefit of stock-based compensation.

Tax Uncertainties

The Company follows the provisions of ASC 740, Income Taxes (“ASC 740”) which applies to all tax positions related to income taxes. ASC 740 provides a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. ASC 740 clarifies accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. If the probability for sustaining a tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement related to unrecognized tax benefits.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of June 30, 2023, 2022 and 2021, the Company had $0.2 million, $0.1 million and $0.1 million in accrued interest and penalties, respectively.

The unrecognized tax benefits for the years ended June 30, 2023, 2022 and 2021 were as follows:

	Year Ended June 30,
	2023		2022		2021
	(In thousands)
Balance at beginning of the year	$	1,729	$	1,057	$	850
Additions for prior year tax positions		568		364		196
Additions for current year tax positions		1,106		482		261
Reductions for prior year tax positions		(247)		(173)		(250)
Balance at end of the year	$	3,156	$	1,729	$	1,057

If recognized, all of the $3.2 million balance of unrecognized tax benefits as of June 30, 2023 would affect the effective tax rate. The Company does not anticipate a significant increase or decrease in unrecognized tax benefits in the next twelve months.

The Company remains subject to audit by the Internal Revenue Service for federal tax purposes for tax years after June 30, 2019.  Certain state and foreign tax jurisdictions are also either currently under audit or remain open under the statute of limitations for the tax years after June 30, 2017.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. The Company has evaluated the business provisions in the CARES Act and adopted the deferral of the employer portion of the social security payroll tax (6.2%) outlined within. The deferral was effective from the enactment date through December 31, 2020. The deferred amount of $14.1 million was paid in two installments, $7.05 million of the deferred amount was paid in December 2021 and the remaining $7.05 million was paid in December 2022.