Income Taxes

12 Months Ended

Jan. 31, 2020

The components of the net income (loss) before the provision for income taxes were as follows:


	Year Ended January 31,
	2020		2019		2018

	(in thousands)
Domestic	$	16,268	$	(204)	$	(3,782)
Foreign	10,094		8,553		264
Total	$	26,362	$	8,349	$	(3,518)

The provision for income taxes was as follows:


	Year Ended January 31,
	2020		2019		2018

	(in thousands)
Current:
Federal	$	—	$	—	$	—
State	14		80		46
Foreign	2,226		685		258
Total current income tax expense	2,240		765		304
Deferred:
Federal	—		—		—
State	—		—		—
Foreign	(1,183)		—		—
Total deferred income tax expense	(1,183)		—		—
Total provision for income taxes	$	1,057	$	765	$	304

The provision for income taxes differs from the amount computed by applying the statutory federal tax rate as follows:


	Year Ended January 31,
	2020			2019			2018

	(in thousands)
Tax at federal statutory rate	$	5,536		$	1,764		$	(1,157)
State taxes	14			67			45
Foreign rate differential	(2,096)			(1,627)			(26)
Stock-based compensation	(32,070)			1,662			3,272
Permanent items	1,009			809			117
Research and development credits	(2,808)			(289)			(150)
Tax uncertainties	1,019			515			516
Change in valuation allowance	30,932			(1,438)			(1,537)
Change in federal tax rate	—			—			(881)
Other	(479)			(698)			105
Total	$	1,057		$	765		$	304
Effective tax rate	4.0		%	9.2		%	(8.6)		%

Deferred income taxes result from differences in the recognition of amounts for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of our deferred income tax assets as of January 31, 2020 and 2019 are as follows:


	As of January 31,
	2020		2019

	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	37,507	$	6,517
Research and development credit carryforwards	5,701		972
Stock-based compensation	4,145		133
Accruals and reserves	11,586		6,856
Deferred revenue	5,234		2,646
Operating lease liabilities	17,716		—
Total deferred tax assets	81,889		17,124
Valuation allowance	(36,353)		(877)
Total deferred tax assets net of valuation allowance	45,536		16,247

Deferred tax liabilities:
Property and equipment	(6,744)		(4,779)
Deferred commissions	(21,156)		(11,468)
Operating right-of-use assets	(16,453)		—
Total deferred tax liabilities	(44,353)		(16,247)

Net deferred tax assets	$	1,183	$	—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management believes it is more likely than not that the deferred tax assets will not be realized; accordingly, a valuation allowance has been recorded on U.S. and U.K. net deferred tax assets. The valuation allowance increased $35.5 million during the fiscal year ended January 31, 2020 and was primarily attributable to net operating losses generated as a result of stock-based compensation windfall benefits. The valuation allowance decreased $2.3 million during the fiscal year ended January 31, 2019 and was primarily attributable to deferred tax liabilities generated from the capitalization of commissions for GAAP purposes. The valuation allowance decreased $3.1 million during the fiscal year ended January 31, 2018 and was primarily attributable to remeasuring the U.S. net deferred tax assets at the applicable tax rate of 21% in accordance with the TCJA, offset by increases in deferred tax assets primarily related to net operating losses.

As of January 31, 2020, we had net operating loss carryforwards of approximately $148.0 million for federal income tax purposes, a portion of which will begin to expire in 2032 if unused. We had net operating loss carryforwards of approximately $88.2 million for state income tax purposes, which will begin to expire in the year 2027 if unused. We also had certain foreign net operating loss carryforwards of $6.8 million, which have an indefinite life.

As of January 31, 2020, we also had research and development credit carryforwards of approximately $6.7 million for federal income tax and $5.9 million for state income tax purposes. The federal research and development tax credit will begin to expire in 2036 if unused. State research and development tax credits carry forward indefinitely.

The federal and state net operating loss carryforwards may be subject to significant limitations under Section 382 and Section 383 of the Internal Revenue Code of 1986 and similar provisions under state law. The Tax Reform Act of 1986 contains provisions that limit the federal net operating loss carryforwards that may be used in any given year in the event of special occurrences, including significant ownership changes. We have completed a Section 382 review and determined that none of our operating losses will expire solely due to Section 382 limitation(s).

We indefinitely reinvest earnings from our foreign subsidiaries and therefore no deferred tax liability has been recognized on the basis difference created by such earnings. We have not provided foreign withholding taxes for any undistributed earnings of our foreign subsidiaries.

We comply with ASC 740-10, Accounting for Uncertainty in Income Taxes, which prescribes a comprehensive model for the recognition, measurement, presentation, and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on a tax return. This pronouncement sets a “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions. Total unrecognized tax benefits are $8.1 million as of January 31, 2020. If recognized, $2.0 million would affect our effective tax rate.

A reconciliation of the beginning and ending balance of total unrecognized tax position is as follows:


	Unrecognized Tax Benefits
	(in thousands)

Balance - January 31, 2017	$	1,205
Increases related to current years’ tax positions	771

Balance - January 31, 2018	1,976
Increases related to current years’ tax positions	802

Balance - January 31, 2019	2,778
Increases related to current years’ tax positions	5,328

Balance - January 31, 2020	$	8,106

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We recognized $0.3 million interest and penalties associated with unrecognized tax benefits during the fiscal year ended January 31, 2020, and we incurred no interest and penalties during the fiscal year ended January 31, 2019.

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. As of January 31, 2020, all of the years remain open to examination by the federal and state tax authorities, for three or four years from the tax year in which net operating losses or tax credits are utilized. We are currently under Internal Revenue Service (“IRS”) examination for the tax year ended January 31, 2018. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. Although the timing of the resolution, settlement, and closure of audits is not certain, we do not believe it is reasonably possible that our unrecognized tax benefits will materially change in the next 12 months.