Income taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income taxes

9. Income taxes

The domestic and foreign components of income (loss) before provision for income taxes consisted of the following (in thousands):

	Fiscal Year Ended December 31,
	2023		2022		2021
Domestic	$	(110,640)	$	(155,528)	$	(80,243)
Foreign	6,999		3,939		1,400
Total net loss before taxes	$	(103,641)	$	(151,589)	$	(78,843)

The provision for income taxes consisted of the following (in thousands):

	Fiscal Year Ended December 31,
	2023		2022		2021
Current
Federal	$	—	$	—	$	—
State	324		45		183
Foreign	3,494		2,241		1,149
Total current income tax expense	3,818		2,286		1,332
Deferred:
Federal	—		—		—
State	—		—		—
Foreign	(165)		—		(149)
Total deferred income tax benefit	(165)		—		(149)
Total provision for income taxes	$	3,653	$	2,286	$	1,183

The Company had an effective tax rate of (3.52)%, (1.51)%, and (1.50)% for the fiscal years ended December 31, 2023, 2022, and 2021, respectively. The difference between the 21% statutory federal tax rate and the effective tax rate was primarily a result of increases in total valuation allowance and non-deductible compensation, which were partially offset by an increase in tax credit creation.

The reconciliation between the statutory federal income tax rate and the Company’s effective tax rate as a percentage of loss before income taxes is as follows:

	Fiscal Year Ended December 31,
	2023		2022		2021
Federal tax expense	21.00	%	21.00	%	21.00	%
State taxes, net of federal benefit	0.50	%	1.24	%	1.07	%
Foreign rate differential	(1.40)	%	(0.33)	%	(0.12)	%
Withholding taxes	(1.77)	%	(0.60)	%	(0.78)	%
Nondeductible compensation	(10.20)	%	(2.52)	%	(5.29)	%
Stock-based compensation	(1.84)	%	(3.18)	%	0.27	%
Change in valuation allowance	(18.33)	%	(21.41)	%	(34.54)	%
Research and development credits	7.94	%	4.69	%	16.87	%
Nontaxable dividends	1.31	%	—	%	—	%
Other	(0.73)	%	(0.40)	%	0.02	%
Effective tax rate	(3.52)	%	(1.51)	%	(1.50)	%

Significant components of the net deferred tax assets (liabilities) for the fiscal years ended December 31, 2023 and 2022, consisted of the following (in thousands):

	December 31,
	2023		2022
Deferred tax assets:
Accruals and reserves	$	4,409	$	5,107
Deferred revenue	62,000		61,285
Net operating loss	36,508		30,047
Research and development tax credits	28,645		20,412
Stock-based compensation expense	6,242		7,995
Indirect tax reserves	240		1,496
Property and equipment, net	2,000		2,031
Capitalized research and development costs	35,505		23,475
Operating lease liabilities	1,460		2,767
Other	564		491
Gross deferred tax assets	177,573		155,106
Valuation allowance	(150,915)		(129,453)
Total deferred tax assets	26,658		25,653
Deferred tax liabilities:
Deferred contract costs	(16,791)		(14,814)
Operating lease right-of-use-assets	(1,129)		(2,245)
Other deferred tax liabilities	(8,573)		(8,594)
Total deferred tax liabilities	(26,493)		(25,653)
Net deferred tax assets	$	165	$	—

A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain. The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets.

As of December 31, 2023 and December 31, 2022, the Company has established a valuation allowance of $150.9 million and $129.5 million, respectively, against its gross deferred tax assets due to the uncertainty surrounding the realization of such assets. The change in total valuation allowance from 2022 to 2023 was an increase of $21.5 million.

As of December 31, 2023, the Company had $160.6 million of federal net operating loss (“NOL”) carryforwards. $72.4 million of federal NOL carryforwards generated in taxable years beginning prior to January 1, 2018 begin expiring in 2036, if not utilized. $88.2 million of federal NOL carryforwards generated in taxable years beginning after December 31, 2017 have an indefinite carryforward period, but are subject to the 80% deduction limitation based upon pre-NOL deduction taxable income.

As of December 31, 2023, the Company had $41.4 million of state NOL carryforwards. The state NOL carryforwards begin expiring in 2030, if not utilized.

As of December 31, 2023 the Company had U.S. federal and state research and development tax credit carryforwards of $23.2 million and $15.3 million, respectively. The federal research and development tax credit carryforwards will expire in various amounts beginning in 2035 while the state research and development tax credit carryforwards can be carried forward indefinitely.

The United States enacted the Tax Cuts and Jobs Act in December 2017, which requires companies to capitalize all their research and development costs for U.S. tax purposes, including software development costs, incurred in tax years beginning after December 31, 2021. Beginning in 2022, the Company began capitalizing and amortizing research and development costs over a five-year period for domestic research and a fifteen-year period for international research rather than expensing these costs.

The utilization of the Company’s net operating losses may be subject to a limitation due to the “ownership change” provisions under Section 382 of the Internal Revenue Code and similar state and foreign provisions. Such limitation may result in the expiration of the net operating loss carryforwards generated before 2018 prior to their utilization. The Company has performed a Section 382 study through December 31, 2022 to determine any potential Section 382 limitations on the utilization of its net operating loss carryforwards and tax credit carryforwards and has determined that the Company experienced two ownership changes with the Company’s Series A and A-1 preferred stock offering in September 2011 and with the Company’s Series B preferred stock offering in November 2012. The Company has estimated that the gross U.S. federal NOL carryforwards from 2010 to 2012 that would be subject to limitation are approximately $3.4 million.

Uncertain tax positions— As of December 31, 2023 and 2022, the Company had gross unrecognized tax benefits of $7.2 million and $5.3 million, respectively, related to federal and state research and development tax credits. The Company has performed a R&D tax credit study and has reserved against a portion of its federal and state R&D tax credit carryforwards. The Company’s tax position of such credits is not more likely than not to be sustained upon examination. The Company has recorded an uncertain tax position related to the deferred tax asset recognized for these credits.

A reconciliation of the beginning and ending balance of unrecognized tax benefit is as follows (in thousands):

	Fiscal Year Ended December 31,
	2023		2022		2021
Gross unrecognized tax benefits at the beginning of the year	$	5,310	$	3,608	$	10,580
Increases (decreases) related to prior year tax positions	58		224		(7,892)
Increases related to current year tax positions	1,864		1,478		920
Statues of limitations expirations	—		—		—
Gross unrecognized tax benefits at the end of the year	$	7,232	$	5,310	$	3,608

The Company is currently unaware of uncertain tax positions that could result in significant additional payments, accruals, or other material deviations in the next 12 months. The Company currently does not record interest and penalties, if any, related to unrecognized tax benefits. None of the unrecognized tax benefits as of December 31, 2023, if recognized in a future period, would affect the Company’s effective tax rate.

The Company intends to indefinitely reinvest any future undistributed foreign earnings outside the United States and therefore such earnings will not be subject to U.S. federal or state, or foreign withholding tax. The Company has prepared an analysis of the repatriation of earnings outside of the U.S. and has determined that the potential tax in connection with such repatriation is approximately $0.5 million.

The Company files income tax returns in U.S. federal, and certain state and foreign jurisdictions with varying statutes of limitations. Due to NOL carryforwards and tax credit carryforwards, the statutes of limitations remain open for tax years from inception of the Company through the fiscal year ended December 31, 2023. There are currently no income tax audits underway by U.S. federal or state tax authorities.

In October 2023, one of the Company’s subsidiaries, Udemy India LLP, received a tax assessment from the India Income Tax Department. The assessment challenged the transfer pricing methodology used by Udemy India LLP for the fiscal year ended March 31, 2021. The Company believes the proposed adjustment is without merit and will vigorously defend its position; however, it could take a number of years to reach resolution of this matter.