Income Taxes

9 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 9 — Income Taxes

Ordinarily, the Company calculates its provision for income taxes at the end of each interim reporting period on the basis of an estimated annual effective tax rate adjusted for tax items that are discrete to each period. However, when a reliable estimate cannot be made, the Company computes its provision for income taxes using the actual effective tax rate (discrete method) for the year-to-date period. The Company’s effective tax rate is highly influenced by the amount of its R&D tax credits. A small change in estimated annual pretax income (loss) can produce a significant variance in the annual effective tax rate given the Company’s expected amount of R&D tax credits. This variability provides an unreliable estimate of the annual effective tax rate. As a result, and in accordance with the authoritative guidance for accounting for income taxes in interim periods, the Company has computed its provision for income taxes for the three and nine months ended December 31, 2021 and 2020 by applying the actual effective tax rate to the income (loss) for the three-month and nine-month periods.

For the three and nine months ended December 31, 2021, the Company recorded an income tax provision of $3.5 million and an income tax benefit of $3.5 million, respectively, resulting in effective tax rates of negative 701% and negative 22%, respectively. The effective tax rates for such periods differed from the U.S. statutory rate primarily due to the benefit of federal and state R&D tax credits, partially offset by the expense for tax deficiencies upon settlement of stock-based compensation during the periods and, in the nine months ended December 31, 2021, a reversal of a deferred tax liability recorded for EBI’s outside basis difference upon the assertion made during the first quarter of fiscal year 2022 to indefinitely reinvest future earnings.

For the three and nine months ended December 31, 2020, the Company recorded an income tax provision of $7.0 million and an insignificant amount, respectively, resulting in effective tax rates of 50% and 24%, respectively. The effective tax rates for the periods differed from the U.S. statutory rate primarily due to the expense for tax deficiencies upon settlement of stock-based compensation during the periods, partially offset by the benefit of federal and state R&D tax credits.

Future realization of existing deferred tax assets ultimately depends on future profitability and the existence of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under tax law. In the event that the Company’s estimate of taxable income is less than that required to utilize the full amount of any deferred tax asset, a valuation allowance is established, which would cause a decrease to income in the period such determination is made.

For the three and nine months ended December 31, 2021, the Company’s gross unrecognized tax benefits increased by $6.7 million and $13.1 million, respectively, including interest and penalties of an insignificant amount, which were included as a component of the provision for income taxes. In the next 12 months it is reasonably possible that the amount of unrecognized tax benefits will not change significantly.