Income Taxes

12 Months Ended

Jun. 30, 2024

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,
	2024		2023
	(In thousands)
Deferred tax assets
Net operating loss carryforward	$	15,553	$	17,628
Reserves		9,031		7,850
Accrued expenses		13,290		10,868
Stock compensation expense		8,162		4,548
Other assets		2,180		3,212
Convertible debt		5,980		8,632
Deferred revenue		456		680
Lease liability		13,879		17,900
Total deferred tax assets		68,531		71,318
Deferred tax liabilities
Capitalized curriculum development		(9,466)		(9,038)
Capitalized software and website development costs		(4,340)		(2,987)
Property and equipment		(9,401)		(8,438)
Right-of-use assets		(13,052)		(16,837)
Returned materials		(2,858)		(2,980)
Purchased intangibles		(14,827)		(15,471)
Total deferred tax liabilities		(53,944)		(55,751)
Net deferred tax asset before valuation allowance		14,587		15,567
Valuation allowance		(7,387)		(6,791)
Net deferred tax asset	$	7,200	$	8,776
Reported as:
Long-term deferred tax assets	$	7,200	$	8,776

The Company maintained a valuation allowance on net noncurrent deferred tax assets of $7.4 million and $6.8 million as of June 30, 2024 and 2023, respectively, predominantly related to foreign and state income tax net operating losses ("NOL").

At June 30, 2024, the Company had approximately $33.6 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, 2024, the Company had tax effected state NOL carryforwards of $1.1 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, 2024, 2023 and 2022 were as follows:

	Years Ended June 30,
	2024		2023		2022
	(In thousands)
Domestic	$	262,802	$	161,270	$	131,967
Foreign		5,863		10,943		15,251
Total income before income taxes	$	268,665	$	172,213	$	147,218

The components of the income tax expense (benefit) for the years ended June 30, 2024, 2023 and 2022 were as follows:

	Years Ended June 30,
	2024		2023		2022
	(In thousands)
Current:
Federal	$	52,678	$	41,360	$	27,969
State		7,660		12,032		7,550
Foreign		1,254		2,327		3,379
Total current		61,592		55,719		38,898
Deferred:
Federal		(667)		(9,033)		1,743
State		3,557		(1,340)		(553)
Total deferred		2,890		(10,373)		1,190
Total income tax expense	$	64,482	$	45,346	$	40,088

The provision for 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:

	Years Ended June 30,
	2024		2023		2022
U.S. federal tax at statutory rates	21.0	%	21.0	%	21.0	%
Permanent items	-		-		0.4
Lobbying	0.1		0.1		0.1
Non-deductible compensation	0.8		1.6		9.3
State taxes, net of federal benefit	3.2		4.4		3.5
Research and development tax credits	(1.5)		(1.4)		(0.8)
Change in valuation allowance	-		(0.4)		0.8
Effects of foreign operations	0.1		0.9		0.3
Reserve for unrecognized tax benefits	0.5		0.9		0.5
Other	0.1		(0.5)		(1.2)
Stock-based compensation	(0.3)		(0.3)		(6.7)
Provision for income taxes	24.0	%	26.3	%	27.2	%

The decrease in the effective income tax rate for the year ended June 30, 2024, as compared to the effective tax rate for the year ended June 30, 2023, was primarily due to non-deductible compensation and state taxes.

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, 2024, 2023 and 2022, the Company had $0.4 million, $0.2 million and $0.1 million in accrued interest and penalties, respectively.

The unrecognized tax benefits for the years ended June 30, 2024, 2023 and 2022 were as follows:

	Years Ended June 30,
	2024		2023		2022
	(In thousands)
Balance at beginning of the year	$	3,156	$	1,729	$	1,057
Additions for prior year tax positions		591		568		364
Additions for current year tax positions		1,205		1,106		482
Reductions for prior year tax positions		(666)		(247)		(173)
Balance at end of the year	$	4,286	$	3,156	$	1,729

If recognized, all of the $4.3 million balance of unrecognized tax benefits as of June 30, 2024 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, 2020.  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, 2018.

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.