Income Taxes

12 Months Ended

Jan. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	Year Ended January 31,
	2021		2020		2019
	(in thousands)
Domestic	$	663,909	$	16,268	$	(204)
Foreign	14,125		10,094		8,553
Total	$	678,034	$	26,362	$	8,349

The provision for income taxes was as follows:

	Year Ended January 31,
	2021		2020		2019
	(in thousands)
Current:
Federal	$	—	$	—	$	—
State	1,023		14		80
Foreign	3,933		2,226		685
Total current income tax expense	4,956		2,240		765
Deferred:
Federal	689		—		—
State	248		—		—
Foreign	(175)		(1,183)		—
Total deferred income tax expense	762		(1,183)		—
Total provision for income taxes	$	5,718	$	1,057	$	765

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

	Year Ended January 31,
	2021			2020			2019
	(in thousands)
Tax at federal statutory rate	$	142,387		$	5,536		$	1,764
State taxes	636			14			67
Foreign rate differential	89			(2,096)			(1,627)
Stock-based compensation	(302,362)			(32,070)			1,662
Permanent items	2,228			1,009			809
Research and development credits	(3,170)			(2,808)			(289)
Tax uncertainties	(607)			1,019			515
Change in valuation allowance	165,869			30,932			(1,438)
Other	648			(479)			(698)
Total	$	5,718		$	1,057		$	765
Effective tax rate	0.8		%	4.0		%	9.2		%

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, 2021 and 2020 are as follows:

	As of January 31,
	2021		2020
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	341,487	$	37,507
Research and development credit carryforwards	12,191		5,701
Stock-based compensation	37,255		4,145
Accruals and reserves	29,195		11,586
Deferred revenue	6,565		5,234
Operating lease liabilities	27,842		17,716
Total deferred tax assets	454,535		81,889
Valuation allowance	(335,051)		(36,353)
Total deferred tax assets net of valuation allowance	119,484		45,536
Deferred tax liabilities:
Property and equipment and intangible assets	(17,229)		(6,744)
Deferred contract acquisition costs	(76,593)		(21,156)
Operating right-of-use assets	(25,550)		(16,453)
Total deferred tax liabilities	(119,372)		(44,353)
Net deferred tax assets	$	112	$	1,183

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, carryback potential if permitted under the tax law, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. Management believes it is more likely than not that some deferred tax assets will not be realized. Accordingly, a valuation allowance has been recorded on U.S. and U.K. deferred tax assets as of January 31, 2021 and 2020. The valuation allowance increased $298.7 million and $35.5 million during the fiscal years ended January 31, 2021 and 2020, respectively, 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.

We intend to continue maintaining a full valuation allowance on our deferred tax assets in the U.S. and U.K. until there is sufficient evidence to support the reversal of all or some portion of these allowances. In our valuation allowance evaluation, we give more weight to evidence that can be objectively verified than to evidence that cannot be objectively verified. Our consideration of the evidence requires management to make a number of significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. Given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that in the foreseeable future, sufficient positive evidence may become available that results in a conclusion that a portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability (pretax income adjusted for permanent differences) that we are able to actually achieve.

As of January 31, 2021, we had net operating loss carryforwards of approximately $1,264.3 million for federal income tax purposes, a small portion of which will begin to expire in 2032 if unused. We had net operating loss carryforwards of approximately $797.0 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 $34.1 million, which have an indefinite life.

As of January 31, 2021, we also had research and development credit carryforwards of approximately $13.6 million for federal income tax and $11.4 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.

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

	Unrecognized Tax Benefits
	(in thousands)
Balance - January 31, 2018	$	1,976
Increases related to current year’s tax positions	802
Balance - January 31, 2019	2,778
Increases related to current year’s tax positions	5,328
Balance - January 31, 2020	8,106
Increases related to current year’s tax positions	6,001
Increases related to prior year’s tax positions	314
Current year acquisitions	885
Lapse of statute of limitations	(422)
Balance - January 31, 2021	$	14,884

Included in the balance of unrecognized tax benefits as of January 31, 2021, 2020, and 2019, are $2.0 million, $2.0 million, and $1.0 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits as income tax expense. During the fiscal year ended January 31, 2021, we recognized interest and penalties of $0.1 million, and had a cumulative liability of $0.2 million as of January 31, 2021. During the fiscal year ended January 31, 2020, we recognized interest and penalties of $0.3 million, and had a cumulative liability of $0.3 million as of January 31, 2020. During the fiscal year ended January 31, 2019, we recognized no interest and penalties.

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. As of January 31, 2021, 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 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was passed into law. On December 27, 2020, the Consolidated Appropriations Act (2021) was passed into law. Both amended portions of relevant tax law and did not have a significant impact on the provision for income taxes for the fiscal year ended January 31, 2021. We will continue to monitor future guidance regarding these acts and other similar stimulus measures to determine any future impacts.