Income and Other Taxes

9 Months Ended

Oct. 30, 2020

INCOME AND OTHER TAXES

The Company's effective income tax rate for the three and nine months ended October 30, 2020 and November 1, 2019 was as follows (in thousands, except percentages):


	Three Months Ended						Nine Months Ended
	October 30, 2020			November 1, 2019			October 30, 2020			November 1, 2019

Loss before income taxes	$	(4,977)		$	(11,392)		$	(17,680)		$	(38,692)
Income tax benefit	$	(1,369)		$	(3,484)		$	(5,309)		$	(12,254)
Effective tax rate	27.5		%	30.6		%	30.0		%	31.7		%

The Company's effective tax benefit rate was 27.5% and 30.0% for the three and nine months ended October 30, 2020, respectively, and 30.6% and 31.7% for the three and nine months ended November 1, 2019, respectively. The changes in the Company's effective income tax rate between the periods were primarily attributable to both the improvement in loss before income taxes for the three months ended October 30, 2020 and the impact of certain discrete adjustments related to stock-based compensation expense of approximately $0.3 million and $0.8 million for the three and nine months ended October 30, 2020, respectively, and $0.5 million and $2.6 million for the three and nine months ended November 1, 2019, respectively. The changes related specifically to the impact of the vesting of certain equity awards for which the fair value on the vesting date was higher than the fair value on the grant date for the three and nine months ended October 30, 2020 and higher than the fair value on the grant date for the three and nine months ended November 1, 2019. The change in fair value, which is measured by the price of the Class A common stock as reported on the Nasdaq Global Select Market, resulted in a higher actual tax deduction for the three and nine months ended October 30, 2020 and a higher actual tax deduction for the three and nine months ended November 1, 2019 than the amounts deducted for financial reporting purposes.

As of each of October 30, 2020 and January 31, 2020, the Company had $4.6 million of deferred tax assets related to net operating loss carryforwards for state tax returns that are not included with those of other Dell entities. These net operating loss carryforwards began expiring in the fiscal year ended February 1, 2019. Due to the uncertainty surrounding the realization of these net operating loss carryforwards, the Company has provided valuation allowances for the full amount as of October 30, 2020 and January 31, 2020. Because the Company is included in the tax filings of other Dell entities, management has determined that it will be able to realize the remainder of its deferred tax assets. If the Company's tax provision had been prepared using the separate return method, the unaudited pro forma pre-tax loss, tax benefit and net loss for the nine months ended October 30, 2020 would have been $17.7 million, $3.7 million and $14.0 million, respectively, as a result of the recognition of a valuation allowance that would have been recorded on a significant amount of deferred tax assets as well as certain attributes from the Tax Cuts and Jobs Act of 2017 that would be lost if not utilized by the Dell consolidated group.

Net deferred tax balances are included in other non-current assets and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.

As of October 30, 2020 and January 31, 2020, the Company had $8.8 million and $10.0 million, respectively, of a net operating loss tax receivable from Dell. The Company had $6.4 million and $6.6 million of unrecognized tax benefits as of October 30, 2020 and January 31, 2020, respectively.

During the nine months ended October 30, 2020, the Internal Revenue Service started an examination of the Company's federal income tax returns for fiscal years 2015 through 2019. While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that it has valid positions supporting its tax returns and that it has provided adequate reserves related to matters contained in tax periods open to examination.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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