INCOME AND OTHER TAXES

3 Months Ended

Apr. 29, 2022

Income Tax Disclosure [Abstract]

INCOME AND OTHER TAXES

INCOME AND OTHER TAXES

The Company’s loss before income taxes and income tax benefit (in thousands) and effective income tax rate for the three months ended April 29, 2022 and April 30, 2021 was as follows (in thousands, except percentages):    

	Three Months Ended
	April 29, 2022			April 30, 2021
Loss before income taxes	$	(27,053)		$	(8,763)
Income tax benefit	$	(5,455)		$	(2,373)
Effective tax rate	20.2		%	27.1		%

During the periods presented in the accompanying Condensed Consolidated Statements of Financial Position, the Company did not file separate federal tax returns as the Company generally was included in the tax grouping of other Dell entities within the respective entity's tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits-for-loss approach. Under the benefits-for-loss approach, net operating losses or other tax attributes are characterized as realized by the Company when those attributes are utilized by other members of the Dell consolidated group.

Effective for tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development (“R&D”) expenses in the year incurred and instead requires taxpayers to capitalize R&D expenses, including software development cost, and subsequently amortize such expenses over five years for R&D activities conducted in the United States and over fifteen years for R&D activities conducted outside of the United States. If Section 174 of the Internal Revenue Code is not modified, repealed or deferred to a future date by the United States Congress, then the Company may have taxable income in the near-term delaying Dell’s utilization of the Company’s net operating losses to future years as the impact decreases over the five- and fifteen-year amortization periods.

The Company's effective tax benefit rate was 20.2% for the three months ended April 29, 2022 and 27.1% for the three months ended April 30, 2021. The change in the Company's effective income tax rate between the periods was primarily attributable to the impact of certain discrete adjustments related to stock-based compensation expense for the three months ended April 29, 2022 and April 30, 2021 of approximately $0.5 million and $(0.3) million, respectively. The change related specifically to the impact of the vesting of certain equity awards for which the fair value on the vesting date was lower than the fair value for the three months ended April 29, 2022 and higher than the fair value for the three months ended April 30, 2021 on the date the equity awards were originally granted. 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 lower actual tax deduction for the three months ended April 29, 2022 and a higher actual tax deduction for the three months ended April 30, 2021 than the amounts deducted for financial reporting purposes.

As of April 29, 2022 and January 28, 2022, the Company had $5.5 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 January 28, 2022. 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 April 29, 2022 and January 28, 2022. 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 three months ended April 29, 2022 would have been $27.1 million, $2.8 million and $24.3 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 April 29, 2022 and January 28, 2022, the Company had a net operating loss receivable from Dell of $15.9 million and $10.7 million, respectively. The Company had $4.3 million and $4.2 million of unrecognized tax benefits as of April 29, 2022 and January 28, 2022, respectively.