Income Taxes

6 Months Ended

Jul. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

We compute our provision for income taxes by applying the estimated annual effective tax rate to year-to-date ordinary income and adjust the provision for discrete tax items recorded in the period. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to significant volatility due to several factors, including our ability to accurately predict the proportion of our pretax income in multiple jurisdictions and certain book-tax differences.

The following table provides details of the provision for income taxes:

	Three Months Ended July 31,						Six Months Ended July 31,
	2023			2022			2023			2022
	(in thousands, except percentages)
Income before provision for income taxes	$	250,373		$	90,399		$	293,603		$	234,071
Provision for income taxes	68,399			44,649			96,185			74,663
Effective tax rate	27.3		%	49.4		%	32.8		%	31.9		%

We had a provision for income taxes of $68.4 million and $44.6 million for the three months ended July 31, 2023 and 2022, respectively. The provision for income taxes was $96.2 million and $74.7 million for the six months ended July 31, 2023 and 2022, respectively. The year-over-year change in effective tax rate for the three and six months ended July 31, 2023 was due primarily to changes in the valuation allowance, tax shortfalls and windfalls on stock-based compensation, and the foreign-derived intangible income deduction. For both the three and six months ended July 31, 2023 and July 31, 2022, the effective tax rate differed from the U.S. federal statutory rate due primarily to the foreign-derived intangible income deduction and research credits, offset by tax shortfalls on stock-based compensation, the valuation allowance recorded on certain deferred tax assets, and other compensation-related permanent differences.

During the three and six months ended July 31, 2023, there were no material changes to the total amount of unrecognized tax benefits and we do not expect any significant changes in the next 12 months.

As required by the 2017 Tax Cuts and Jobs Act, we started capitalizing research and development expenses incurred beginning 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 increases our cash tax liabilities but also decreases our effective tax rate due to increasing the foreign-derived intangible income deduction. The cash flow impact will 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.