Income Taxes

6 Months Ended

Jan. 31, 2018

7. Income Taxes

Effective Tax Rate

We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017 and reduces the U.S. statutory federal corporate tax rate from 35% to 21%. The effective date of the tax rate change is January 1, 2018. With our fiscal year ending July 31, the change will result in a blended lower U.S. statutory federal rate of 26.9% for fiscal year 2018. As a result, we adjusted our annual effective tax rate for the three and six months ended January 31, 2018, as well as adjusted our U.S. net deferred tax asset balance at the lower rates.

At January 31, 2018, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. For deferred tax balances we recognized a provisional charge of $39 million, which is included as a component of our income tax provision for the three and six months ended January 31, 2018.

Additionally, we have made provisional estimates of the impact of the Tax Act’s changes to our fiscal 2018 annual effective tax rate for items such as meals and entertainment and executive deferred compensation deductions. We do not expect to have any material tax impact from the foreign tax provisions of the Tax Act.

On December 22, 2017 the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Act in the period of enactment. The guidance allows us to record provisional amounts to the extent a reasonable estimate can be made and provides us with up to one year from enactment date to finalize accounting for the impacts of the Tax Act. Since the Tax Act was passed in Intuit’s second quarter, the deferred tax re-measurements and other items are considered provisional due to the forthcoming guidance and ongoing analysis of the final year-end data and tax positions. The analysis is expected to be completed within the 12-month measurement period in accordance with SAB 118.

Current quarter and year to date income tax and effective tax rates

For the three and six months ended January 31, 2018, we recognized excess tax benefits on share-based compensation of $8 million and $33 million in our provision for income taxes. These amounts include the impact of the Tax Act’s U.S. statutory federal corporate tax rate reduction on the benefit that we recorded in our first quarter. For the three and six months ended January 31, 2017, we recognized excess tax benefits on share-based compensation of $7 million and $26 million in our provision for income taxes.

We recorded a tax provision of $40 million on income of $19 million for the three months ended January 31, 2018. As a result of the lower enacted tax rate, the tax provision for the three months ended January 31, 2018 includes a charge of $4 million to reduce the tax benefit recorded in the first quarter of fiscal 2018 which was calculated at the higher effective tax rate. We recorded a tax benefit of $2 million on a loss of $40 million for the six months ended January 31, 2018. Excluding the $4 million charge and the discrete tax items primarily related to the re-measurement of our net deferred tax asset balance and the share-based compensation tax benefits mentioned above, our effective tax rate for the three and six months ended January 31, 2018 was 27% and did not differ significantly from the federal statutory rate of 26.9%.

We recorded a tax benefit of $3 million on income of $10 million for the three months ended January 31, 2017. Our effective tax rate for the six months ended January 31, 2017 was approximately 72%. Excluding discrete tax items primarily related to share-based compensation tax benefits, our effective tax rate for both periods was 34% and did not differ significantly from the federal statutory rate of 35%. The tax benefit we received from the domestic production activities deduction and the federal research and experimentation credit were partially offset by the tax expense related to state income taxes and nondeductible share-based compensation.

Unrecognized Tax Benefits and Other Considerations

The total amount of our unrecognized tax benefits at July 31, 2017 was $61 million. Net of related deferred tax assets, unrecognized tax benefits were $38 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $38 million. There were no material changes to these amounts during the six months ended January 31, 2018. The impacts of the Tax Act are not material for the unrecognized tax benefits. We do not believe that it is reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months.