Income Taxes

12 Months Ended

Oct. 31, 2024

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The domestic and foreign components of our total income before provision for income taxes are as follows:

	Year Ended October 31,
	2024		2023		2022
	(in thousands)
United States	$	1,333,132	$	1,144,410	$	1,028,829
Foreign	180,726		161,060		74,623
Total income before provision for income taxes	$	1,513,858	$	1,305,470	$	1,103,452

The components of the provision (benefit) for income taxes are as follows:

	Year Ended October 31,
	2024		2023		2022
	(in thousands)
Current:
Federal	$	345,859	$	252,186	$	109,030
State	19,808		23,042		23,593
Foreign	110,021		22,869		43,076
	475,688		298,097		175,699
Deferred:
Federal	(312,677)		(191,249)		(38,901)
State	(39,164)		(219)		(1,067)
Foreign	(24,129)		(16,441)		3,654
	(375,970)		(207,909)		(36,314)
Provision (benefit) for income taxes	$	99,718	$	90,188	$	139,385

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

	Year Ended October 31,
	2024		2023		2022
	(in thousands)
Statutory federal tax	$	317,912	$	274,149	$	231,723
State tax (benefit), net of federal effect	48,393		438		(2,870)
Federal tax credits	(70,119)		(60,500)		(55,708)
Tax (benefit) on foreign earnings	3,316		(17,571)		23,709
Foreign-derived intangible income deduction	(104,835)		(80,034)		(38,816)
Tax settlements	—		(23,752)		—
Stock-based compensation	(43,419)		(39,995)		(50,469)
Changes in valuation allowance	(57,371)		29,631		19,794
Other	5,841		7,822		12,022
Provision (benefit) for income taxes	$	99,718	$	90,188	$	139,385

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted, which significantly changed prior U.S. tax law and includes numerous provisions that affect our business. Effective in our fiscal 2023 year, the Tax Act requires that research and development expenditures are capitalized and amortized instead of being deducted when incurred. Domestic research is capitalized over five years and foreign research is capitalized over fifteen years. Capitalization of research and development expenditures also results in a corresponding deferred tax benefit and decreased our effective tax rate due to increasing the foreign-derived intangible income deduction.

We have provided for foreign withholding taxes on undistributed earnings of certain of our foreign subsidiaries to the extent such earnings are no longer considered to be indefinitely reinvested in the operations of those subsidiaries. Where foreign subsidiaries are considered indefinitely reinvested, and if the tax effect of undistributed earnings and other outside basis differences were recognized, the nature of taxes expected would primarily be withholding, taxes in non-conforming states, and taxes on intermediate holding companies outside of the U.S., net of foreign tax credits where available. As of October 31, 2024, the taxes due, after allowable foreign tax credits, are not expected to be material.

The significant components of deferred tax assets and liabilities are as follows:

	As of October 31,
	2024		2023
	(in thousands)
Net deferred tax assets:
Deferred tax assets:
Deferred revenue	$	37,849	$	37,641
Deferred compensation	73,869		69,824
Intangible and depreciable assets	65,489		94,299
Capitalized research and development costs	978,085		591,617
Stock-based compensation	74,934		64,326
Tax loss carryovers	37,787		36,804
Foreign tax credit carryovers	42,534		41,584
Research and other tax credit carryovers	107,643		178,416
Operating Lease Liabilities	108,235		118,679
Accruals and reserves	49,935		27,636
Gross deferred tax assets	1,576,360		1,260,826
Valuation allowance	(170,672)		(221,713)
Total deferred tax assets	1,405,688		1,039,113
Deferred tax liabilities:
Intangible assets	80,034		98,305
Operating lease Right-of-Use-Assets	84,512		94,068
Accruals and reserves	—		602
Undistributed earnings of foreign subsidiaries	8,800		8,900
Other	21,641		19,169
Total deferred tax liabilities	194,987		221,044
Net deferred tax assets	$	1,210,701	$	818,069

It is more likely than not that the results of future operations will be able to generate sufficient taxable income to realize the net deferred tax assets. The valuation allowance provided against our deferred tax assets as of October 31, 2024 is mainly attributable to foreign tax credits available to non-U.S. subsidiaries and the California research credits. The valuation allowance decreased by a net of $51.0 million in fiscal 2024, primarily related to anticipated utilization of California research credits.

We have the following tax loss and credit carryforwards available to offset future income tax liabilities:

Carryforward	Amount		Expiration Date
	(in thousands)
Federal net operating loss carryforward	$	69,062	2025-2043
Federal research credit carryforward	6,214		2025-2035
Federal foreign tax credit carryforward	34,217		2034
International foreign tax credit carryforward	5,337		Indefinite
International net operating loss carryforward	51,326		2027-Indefinite
California research credit carryforward	151,380		Indefinite
Other state research credit carryforward	25,621		2027-2044
State net operating loss carryforward	138,482		2028-2045

The federal and state net operating loss carryforward is from acquired companies and the annual use of such loss is subject to significant limitations under Internal Revenue Code Section 382. Foreign tax credits may only be used to offset tax attributable to foreign source income.

The gross unrecognized tax benefits decreased by approximately $3.0 million during fiscal 2024 resulting in gross unrecognized tax benefits of $61.9 million as of October 31, 2024. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits is summarized as follows:

	As of October 31,
	2024		2023
	(in thousands)
Beginning balance	$	64,880	$	71,898
Increases in unrecognized tax benefits related to prior year tax positions	1,106		211
Decreases in unrecognized tax benefits related to prior year tax positions	(8,639)		(25,678)
Increases in unrecognized tax benefits related to current year tax positions	8,036		8,029
Reductions in unrecognized tax benefits due to lapse of applicable statute of limitations	(4,380)		(249)
Increases in unrecognized tax benefits acquired	161		165
Changes in unrecognized tax benefits due to foreign currency translation	690		10,504
Ending balance	$	61,854	$	64,880

As of October 31, 2024 and 2023, approximately $61.9 million and $64.9 million, respectively, of the unrecognized tax benefits would affect our effective tax rate if recognized upon resolution of the uncertain tax positions.

Interest and penalties related to estimated obligations for tax positions taken in our tax returns are recognized as a component of income tax expense (benefit) in the consolidated statements of income and totaled approximately $(1.0) million, $(10.6) million and $0.8 million for fiscal years 2024, 2023 and 2022, respectively. As of October 31, 2024 and 2023, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $1.1 million and $2.1 million, respectively.

The timing of the resolution of income tax examinations, and the amounts and timing of various tax payments that are part of the settlement process, are highly uncertain. Variations in such amounts and/or timing could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that in the coming 12 months, it is reasonably possible that either certain audits and ongoing tax litigation will conclude or the statute of limitations on certain state and foreign income and withholding taxes will expire, or both. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decrease in underlying unrecognized tax benefits is between $0.0 and $12.0 million.

We and/or our subsidiaries remain subject to tax examination in the following jurisdictions:

Jurisdiction	Year(s) Subject to Examination
United States	Fiscal years after 2020
California	Fiscal years after 2019
Ireland	Fiscal years after 2019
Japan	Fiscal years after 2019
Korea	Fiscal years after 2020
Taiwan	Fiscal years after 2022
China	Fiscal years after 2014
India	Fiscal years after 2019

In addition, we have made acquisitions with operations in several of our significant jurisdictions which may have years subject to examination different from the years indicated in the above table.

Non-U.S. Examinations

Hungarian Tax Authority

In 2017, the Hungarian Tax Authority (the HTA) assessed withholding taxes of approximately $25.0 million and interest and penalties of $11.0 million, against our Hungary subsidiary (Synopsys Hungary). Synopsys Hungary contested the assessment with the Hungarian Administrative Court (Administrative Court). In 2018, Synopsys Hungary paid the assessment. Following years of litigation, the Administrative Court issued its written decision in favor of Synopsys Hungary on May 17, 2023, and the HTA subsequently refunded Synopsys Hungary the tax, penalty and interest paid in fiscal 2018, as well as additional interest all totaling $39.1 million (including foreign currency effects). During the third quarter of fiscal 2023, we released our unrecognized tax benefit and offsetting U.S. foreign tax credits, resulting in a net benefit of $23.8 million.

We are also under examination by the tax authorities in certain other jurisdictions. No material assessments have been proposed in these examinations.

Legislative Developments

Effective our fiscal 2024, we are subject to the new 15% corporate alternative minimum tax (CAMT) enacted as part of the Inflation Reduction Act of 2022. We do not expect any impact of CAMT in fiscal 2024, due to our regular tax liability exceeding CAMT. The details of the computation will be subject to final regulations to be issued by the U.S. Department of the Treasury. We will monitor regulatory developments and will continue to evaluate the impact, if any, of the minimum tax.

The IR Act imposes a 1% excise tax on the fair market value of stock repurchases made by covered corporations after December 31, 2022. The total taxable value of shares repurchased is reduced by the fair market value of any newly issued shares during the taxable year. As of October 31, 2024, this does not have any impact on our consolidated financial statements.

On June 27, 2024, California enacted SB-167, which suspends the use of California net operating loss and limits the use of California research tax credits to $5 million for our fiscal 2025-2027. On June 29, 2024, California enacted SB-175, which provides a refund mechanism effective beginning in our fiscal 2025 for the incremental tax that was paid as a result of SB-167.

The Organization for Economic Co-operation and Development (OECD) has a two-pillar solution to address tax challenges arising from digitalization of the economy. Included in this two-pillar solution is the Pillar Two Model Rules (Pillar Two) which defines a global minimum tax rules and includes a 15% minimum tax rate. Various countries have started to enact new laws related to Pillar Two, including certain new laws effective beginning in fiscal 2025. Based on our preliminary analysis, we are not expecting the impact of Pillar 2 to be material.