Income Taxes

12 Months Ended

Jan. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

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

	Year Ended January 31,
	2023		2022		2021
	(in thousands)
Domestic	$	196,224	$	1,047,318	$	663,909
Foreign	53,052		54,314		14,125
Total	$	249,276	$	1,101,632	$	678,034

The provision for (benefit from) income taxes was as follows:

	Year Ended January 31,
	2023		2022		2021
	(in thousands)
Current:
Federal	$	254,505	$	69,853	$	—
State	33,548		20,174		1,023
Foreign	18,473		12,027		3,933
Total current income tax expense	306,526		102,054		4,956
Deferred:
Federal	(173,941)		(293,704)		689
State	16,673		(82,561)		248
Foreign	(3,693)		204		(175)
Total deferred income tax expense	(160,961)		(376,061)		762
Total provision for (benefit from) income taxes	$	145,565	$	(274,007)	$	5,718

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

	Year Ended January 31,
	2023			2022			2021
	(in thousands, except percentages)
Tax at federal statutory rate	$	52,277		$	231,350		$	142,387
State taxes	13,666			24,840			636
Foreign rate differential	1,017			1,830			89
Non-deductible compensation	10,231			—			—
Stock-based compensation	124,631			(135,250)			(302,362)
Permanent Items	9,090			3,971			2,228
Foreign-derived intangible income deduction	(76,686)			(34,131)			—
Research and development credits	(38,127)			(42,973)			(3,170)
Tax uncertainties	2,296			244			(607)
Change in valuation allowance	39,288			(322,231)			165,869
Deferred rate change	2,014			—			—
Other	5,868			(1,658)			648
Total	$	145,565		$	(274,007)		$	5,718
Effective tax rate	58.4		%	(24.9)		%	0.8		%

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, 2023 and 2022 are as follows:

	As of January 31,
	2023		2022
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	14,788	$	21,558
Research and development credit carryforwards	12,792		9,985
Stock-based compensation	116,798		44,490
Accruals and reserves	39,758		14,475
Deferred revenue	303,167		260,322
Capitalized research expenditures	245,708		131,010
Operating lease liabilities	23,140		25,892
Total deferred tax assets	756,151		507,732
Valuation allowance	(53,570)		(12,605)
Total deferred tax assets net of valuation allowance	702,581		495,127
Deferred tax liabilities:
Property and equipment and intangible assets	(36,274)		(26,733)
Deferred contract acquisition costs	(89,839)		(62,814)
Operating right-of-use assets	(19,352)		(23,466)
Total deferred tax liabilities	(145,465)		(113,013)
Net deferred tax assets	$	557,116	$	382,114

The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence during the year ended January 31, 2023, we continue to believe that it is more likely than not that the tax benefits of the U.K. net deferred tax assets may not be realized. Accordingly, we maintained a full valuation allowance against the tax benefits of these net deferred tax assets. Based on the available objective evidence during the year ended January 31, 2023, we believe that it is more likely than not that the tax benefits relating to U.S. losses that are capital in nature may not be realized prior to expiration. Accordingly, we have maintained a valuation allowance against these deferred tax assets. Based on the available objective evidence during the year ended January 31, 2023, we believe that it is more likely than not that the tax benefits of certain state net deferred tax assets may not be realized. Management applied significant judgement in assessing the positive and negative evidence available in the determination of the amount of certain state deferred tax assets that were more likely than not to be realized in the future. Accordingly, given our current earnings, anticipated future earnings, and continued accumulation of certain state tax credits, we have recorded a full valuation allowance against the tax benefits of these deferred tax assets. We intend to maintain the applicable valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

As of January 31, 2023, we had net operating loss carryforwards of approximately $22.9 million for federal income tax purposes, $26.9 million for state income tax purposes, which will begin to expire in the year 2033 if unused. We also had certain foreign net operating loss carryforwards of $32.5 million, which have an indefinite life.

As of January 31, 2023, we also had research and development credit carryforwards of approximately $1.2 million for federal income tax purposes and $22.8 million for state income tax purposes. The federal research and development tax credits have a twenty-year carryover period while the 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. Such provisions limit the 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 materially 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)	Year Ended January 31,
	2023		2022		2021
Balance, beginning of year	$	19,171	$	14,884	$	8,106
Tax Positions taken in prior year:
Gross increases	877		—		314
Gross decreases	—		(3,764)		—
Tax Positions taken in current year:
Gross increases	10,547		8,211		6,001
Gross decreases	—		—		—
Lapse of Statute of Limitations	(191)		(160)		(422)
Acquisitions	—		—		885
Balance, end of year	$	30,404	$	19,171	$	14,884

As of January 31, 2023, gross unrecognized tax benefits related to uncertain tax positions were $30.4 million ($32.5 million total, including $1.6 million associated with interest and penalties). As of January 31, 2022, gross unrecognized tax benefits related to uncertain tax positions were $19.2 million ($19.6 million total, including $0.4 million associated with interest and penalties). As of January 31, 2021, gross unrecognized tax benefits related to uncertain tax positions were $14.9 million ($15.0 million total, including $0.1 million associated with interest and penalties). We recognized approximately $1.6 million, $0.4 million, and $0.1 million in potential interest and penalties associated with uncertain tax positions during fiscal years ended January 31, 2023, 2022, and 2021, respectively. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties) will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in our income tax provision.

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign jurisdictions. As of January 31, 2023, 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.

As required by the 2017 Tax Cuts and Jobs Act, we are capitalizing research and development expenses incurred in fiscal year 2023. These expenses are capitalized and amortized over five years for domestic research and fifteen years for international research. The mandatory capitalization requirement increased our cash tax liabilities but also decreased our effective tax rate due to increasing the foreign-derived intangible income deduction. The cash flow impact may decrease over time as capitalized research and development expenditures continue to amortize.

The Inflation Reduction Act was signed into law in August 2022. The act included tax provisions for a 15% corporate book income minimum tax effective for tax years beginning after December 31, 2022. We do not expect the Inflation Reduction Act to have a material impact on our consolidated financial statements.