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Income Taxes

12 Months Ended

Apr. 30, 2020

14. Income Taxes

The components of income before income taxes are as follows (in thousands):


	Year Ended April 30,
	2020		2019		2018
Domestic	$	52,730	$	50,644	$	32,651
Foreign		(60)		(166)		(34)
Income from continuing operations before income taxes		52,670		50,478		32,617

Equity method investment loss		(5,487)		(3,944)		(1,283)
Total income from continuing operations before income taxes	$	47,183	$	46,534	$	31,334

The Company expects any foreign earnings to be reinvested in such foreign jurisdictions and, therefore, no deferred tax liabilities for U.S. income taxes on undistributed earnings are recorded. The foreign subsidiaries do not have any undistributed earnings.

A reconciliation of income tax expense computed using the U.S. federal statutory rates to actual income tax expense (benefit) is as follows:


	Year Ended April 30,
	2020		2019		2018
U.S. federal statutory income tax rate	21.0	%	21.0	%	30.4	%
State and local income taxes, net of federal benefit	(2.1)		(2.2)		(2.2)
R&D and other tax credits	(6.8)		(8.1)		(7.0)
Valuation allowance	3.4		3.7		4.9
Foreign rate differential	—		—		0.1
Return to provision adjustments	0.1		(0.3)		(0.1)
Permanent items	0.7		0.8		(2.7)
Foreign derived intangible income	(3.9)		(3.7)		—
Excess benefit of equity awards	(1.5)		(3.1)		(4.4)
Tax Act	—		—		10.4
Other	0.2		1.1		0.6
Effective income tax rate	11.1	%	9.2	%	30.0	%

The components of the provision (benefit) for income taxes are as follows (in thousands):


	Year Ended April 30,
	2020		2019		2018
Current:
Federal	$	3,005	$	1,953	$	6,010
State		390		228		900
Foreign		—		—		—
		3,395		2,181		6,910
Deferred:
Federal		2,063		1,945		3,272
State		421		551		(330)
Foreign		(31)		(36)		(52)
		2,453		2,460		2,890
Total income tax expense	$	5,848	$	4,641	$	9,800

Significant components of the Company’s deferred income tax assets and liabilities are as follows (in thousands):


	April 30,
	2020		2019
Deferred income tax assets:
Accrued expenses	$	3,337	$	3,559
Stock based compensation		2,259		1,647
Allowances, reserves, and other		1,784		1,579
Outside basis difference		2,264		1,150
Unrealized loss on securities		9		—
Net operating loss and credit carry-forwards		12,832		13,208
Intangibles basis		605		125
Lease liability		2,282		—
Total deferred income tax assets		25,372		21,268
Deferred income tax liabilities:
Fixed asset basis		(1,218)		(425)
Revenue recognition		(3,112)		(2,909)
Right-of-use asset		(1,965)		—
Total deferred income tax liabilities		(6,295)		(3,334)
Valuation allowance		(14,149)		(11,278)
Net deferred tax assets	$	4,928	$	6,656

At April 30, 2020 and 2019 the Company recorded a valuation allowance of $14,149,000 and $11,278,000, respectively, against state R&D credits as the Company is currently generating more tax credits than it will utilize in future years and against the outside basis difference in an equity method investee. The valuation allowance increased by $2,871,000 and $2,710,000 for April 30, 2020 and April 30, 2019, respectively.

At April 30, 2020 the Company had state credit carryforwards of $26,694,000 that do not expire and federal tax credit carryforwards of $2,729,000 that expire in 2040.

At April 30, 2020, the Company had a state and foreign net operating loss carryforward of approximately $10,000 and $660,000, respectively. The state net operating loss carryforwards carry forward indefinitely. $320,000 of the foreign loss carryforwards expire in fiscal 2021.

At April 30, 2020 and 2019, the Company had approximately $14,347,000 and $12,593,000, respectively, of unrecognized tax benefits all of which would impact the Company’s effective tax rate if recognized. The Company estimates that $53,600 of its unrecognized tax benefits will decrease in the next twelve months due to statute of limitation expiration.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the years ended April 30, 2020 and 2019 (in thousands):


	April 30,
	2020		2019
Balance as of May 1	$	12,593	$	11,170
Increases related to prior year tax positions		62		216
Decreases related to prior year tax positions		—		—
Increases related to current year tax positions		1,971		1,756
Decreases related to lapsing of statute of limitations		(279)		(549)
Balance as of April 30	$	14,347	$	12,593

The Company records interest and penalties on uncertain tax positions to income tax expense. As of April 30, 2020 and 2019, the Company had accrued approximately $21,000 and $18,000, respectively, of interest and penalties related to uncertain tax positions. The Company is currently under audit by various state jurisdictions. The 2016 to 2018 tax years remain open to examination by the IRS for federal income taxes. The tax years 2009 to 2011 and 2015 to 2018 remain open for major state taxing jurisdictions.

During the fiscal year ended April 30, 2020, the Company recorded a reversal of a $279,000 reserve for uncertain tax positions due to the lapse of prior year statue.

On December 22, 2017, the Tax Act was signed into law, which resulted in significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, repeal of the corporate alternative minimum tax, repeal of the deduction for domestic production activities, a deduction for certain Foreign Derived Intangible Income (“FDII”), and limitation on the deductibility of certain executive compensation.

In accordance with ASC 740, Income Taxes, the Company is required to record the effects of tax law changes in the period enacted. As the Company has an April 30 fiscal year end, its U.S. federal corporate income tax rate was blended in fiscal 2018, resulting in a statutory federal rate of approximately 30.4% (8 months at 35% and 4 months at 21%), and 21% for subsequent fiscal years. The Company remeasured its existing deferred tax assets and liabilities at the rate the Company expected to be in effect when those deferred taxes will be realized and recorded a one-time deferred tax expense of approximately $3,300,000 during the fiscal year ended April 30, 2018.

The Company followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provided additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.

The measurement period under SAB 118 closed during the year ended April 30, 2019. The Company has finalized its accounting for the impact of the Tax Act during and reached the following conclusions on the previous provisional estimates.

The Company has concluded it will be eligible to claim the FDII deduction and has reflected a rate benefit in the provision for income taxes. The Company expects the IRS will be issuing additional guidance that could ultimately impact the size of the benefit. In addition, the Company has concluded that its foreign subsidiaries are in a cumulative earnings and profits deficit and, therefore, has confirmed that it will not have an income tax payable as a result of the one-time deemed repatriation tax.