Income Taxes

12 Months Ended

Jun. 30, 2020

Income Taxes

Income Taxes

(13) Income Taxes

(a) Income Taxes

Income tax expense (benefit) for the years ended June 30, 2018, 2019 and 2020 consists of the following:

	Year ended June 30,
	2018		2019		2020
Current taxes
U.S. federal	$	294	$	—	$	—
State and local		364		90		(92)
Deferred taxes:
U.S. federal		(15,167)		5,449		403
State and local		(7,338)		(1,316)		2,352
Total income tax expense (benefit)	$	(21,847)	$	4,223	$	2,663

(b) Tax Rate Reconciliation

Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 27.6% for the years ended June 30, 2018, and 21% for the years ended June 30, 2019 and 2020 to pretax income as a result of the following:

	Year ended June 30,
	2018			2019			2020
Income tax expense (benefit) at statutory federal rate		27.6	%		21.0	%		21.0	%
Increase (reduction) in income taxes resulting from:
Research and development and other credits		(6.6)			(3.0)			(3.2)
Non-deductible expenses		4.6			1.3			1.6
Change in valuation allowance		(136.0)			0.3			5.2
Effect of Tax Cuts and Jobs Act		51.5			—			—
Stock-based compensation expense		(58.3)			(10.4)			(18.3)
State and local income taxes, net of federal income tax benefit		(13.5)			(2.0)			(1.8)
Other		0.3			0.1			(0.5)
		(130.4)	%		7.3	%		4.0	%

The effective tax rate for the years ended June 30, 2019 and 2020 was 7.3% and 4.0%, respectively, on pre-tax income of $58,046 and $67,118, respectively. The decrease in the effective tax rate is primarily due to increased deductions related to stock compensation offset by an increase to the valuation allowance.

(c) Components of Deferred Tax Assets and Liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 2019 and 2020 are presented below.

	Year ended June 30,
	2019		2020
Deferred tax assets:
Deferred rent	$	1,963	$	—
Operating lease liability		—		21,041
Accrued expenses		4,344		9,915
Stock-based compensation		10,373		13,351
Net operating loss carryforwards		9,980		13,596
Federal and state tax credits		11,977		16,714
Intangible assets		385		—
Total deferred tax assets		39,022		74,617
Valuation allowance		(502)		(3,967)
Net deferred tax assets		38,520		70,650
Deferred tax liabilities:
Deferred contract costs		(27,116)		(41,229)
Operating lease right-of-use assets		—		(12,607)
Research and development costs		(6,294)		(8,563)
Intangible assets		—		(781)
Depreciation		(5,581)		(11,269)
Total deferred tax liabilities		(38,991)		(74,449)
Net deferred tax asset (liability)	$	(471)	$	(3,799)

Succeeding multiple years of recording a full valuation allowance, the Company concluded in the third quarter of fiscal 2018, that all of the valuation allowance for the Company’s U.S. federal deferred tax assets and substantially all state deferred tax assets was no longer needed. This was primarily due to three years’ cumulative income through the third quarter of fiscal 2018 and the forecast of future taxable income. At March 31, 2018, based on the evaluation of positive and negative evidence, management believed it was more likely than not that the net deferred tax assets could be realized for all federal and substantially all state purposes. Accordingly, the Company recognized a non-recurring tax benefit of $22,771 related to the valuation allowance reversal. As of June 30, 2020, the Company maintains a valuation allowance of $3,967 for certain state tax benefits which may not be realized. Such assessment may change in the future as further evidence becomes available.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%. Following the passage of the Tax Act and in accordance with ASC 740, companies were required to re-measure deferred tax balances using the new enacted tax rates. During fiscal year 2018, the Company recorded a one-time net $8,626 tax expense to revalue its net deferred tax assets to the newly enacted federal statutory rate. The Company generally expects to benefit from the lower statutory rates provided by the Tax Act.

In December 2017, the staff of the SEC issued guidance under Staff Accounting Bulletin No. 118 (later codified into ASU 2018-05), “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” allowing taxpayers to record provisional amounts for reasonable estimates when they do not have the necessary information available, prepared or analyzed in reasonable detail to complete their accounting for certain income tax effects of the Tax Act. The SEC also issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the related tax impacts. The Company’s analysis was completed during the second quarter of fiscal 2019 with no additional adjustments made.

At June 30, 2020, the Company has gross net operating loss carryforwards for federal income tax purposes of approximately $55,801, of which $35,736 expire from 2034 to 2038. The Company has gross net operating loss carryforwards for state income tax purposes of approximately $32,262, of which $26,307 expire from 2021 to 2040. The remaining $26,020 federal and state net operating loss carryforwards have an indefinite utilization period. The Company

also has gross federal and state research and development tax credits and other state credit carryforwards of approximately $16,714, which expire between 2021 and 2040.

The Company had no unrecognized tax benefits as of June 30, 2018, 2019 and 2020, respectively.

The Company files income tax returns with the United States federal government and various state jurisdictions. Certain tax years remain open for federal and state tax reporting jurisdictions in which the Company does business due to net operating loss carryforwards and tax credits unutilized from such years or utilized in a period remaining open for audit under normal statute of limitations relating to income tax liabilities. The Company, including its domestic subsidiaries, files a consolidated federal income tax return. For years before fiscal year ended June 30, 2017, the Company is no longer subject to U.S. federal examination; however, the Internal Revenue Service (IRS) has the ability to review years prior to fiscal year 2017 to the extent the Company utilized tax attributes carried forward from those prior years. The statute of limitations on state filings is generally three to four years.