|12 Months Ended|
May 31, 2018
|Income Taxes [Abstract]|
Note K — Income Taxes
The components of deferred tax assets and liabilities are as follows:
The deferred tax asset related to tax credit carry forward consists primarily of alternative minimum tax credits, which were fully utilized during the current fiscal year. The deferred tax asset related to NOL carry forward is comprised of $4.1 million of federal NOL carry forwards and $1.8 million of state NOL carry forwards. The federal NOL carry forwards were acquired through various acquisitions and expire between the fiscal years ending May 31, 2020 through May 31, 2035. The state NOL carry forwards expire between the fiscal years ending May 31, 2019 through May 31, 2038.
The components of the provision for income taxes are as follows:
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
The effective income tax rate for fiscal 2018 was significantly impacted by the enactment of the Tax Act. In addition, the effective income tax rates for fiscal 2018 and fiscal 2017 were impacted by the recognition of a net discrete tax benefit related to employee stock-based compensation payments.
The Tax Act makes broad and complex changes to U.S. federal corporate income taxation including, but not limited to: (i) reducing the statutory corporate tax rate from 35% to 21% (a blended statutory tax rate of 29.2% for fiscal 2018); (ii) repeal of the Section 199 qualified production activities deduction; (iii) creating new or furthering limitations to the deductibility of certain officer compensation, interest, meals, entertainment and other expenses; and (iv) changing from a worldwide to a territorial taxation system. In December 2017, the staff of the SEC issued guidance under Staff Accounting Bulletin (“SAB”) No. 118, “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.
As a result of the Tax Act, the Company derived estimated tax benefits of $102.6 million, including a net tax benefit of $25.5 million related to the revaluation of the Company’s net deferred tax liabilities and a net tax benefit of $77.1 million related to the reduction in the Company’s statutory income tax rate for fiscal 2018 applied to income before taxes. These amounts totaled $0.07 per diluted share and $0.21 per diluted share, respectively. This analysis is complete except for provisional amounts that were determined in accordance with SAB No. 118 related to certain equity compensation arrangements. Further Internal Revenue Service guidance related to whether these compensation arrangements meet the transition rule under the Tax Act is expected to be released within the next nine months and any change to the provisional amounts as a result of this further guidance is not anticipated to be material.
During fiscal 2016, the Company engaged tax specialists to assess the qualification of its customer-facing computer software for the federal “Qualified Production Activities Deduction” under Internal Revenue Code (“IRC”) Section 199, and the regulations thereunder. Based on this assessment, the Company concluded that certain of its software offerings qualified for this tax deduction for fiscal 2016 and prior tax years that remained open to Internal Revenue Service (“IRS”) examination. The Company submitted claims to recover these tax benefits for prior tax years and claimed the fiscal 2016 tax benefits when it filed its 2016 tax return. Accordingly, the Company recognized the tax benefits, and related tax reserves, for its qualified customer-facing activities for these years in fiscal 2016.
Uncertain income tax positions: The Company is subject to U.S. federal income tax, numerous local and state tax jurisdictions within the U.S., and taxes in Europe. The Company maintains a reserve for uncertain tax positions. As of May 31, 2018 and May 31, 2017, the total reserve for uncertain tax positions, including interest and net of federal benefits, was $14.7 million and $39.2 million, respectively, and was included in long-term liabilities on the Consolidated Balance Sheets.
A reconciliation of the beginning and ending amounts of the Company’s gross unrecognized tax benefits, not including interest or other potential offsetting effects, is as follows:
In December 2016, the Company executed a closing agreement that resolved tax matters related to the audits by New York State for the fiscal year ended May 31, 2012 (“fiscal 2012”) through the fiscal year ended May 31, 2014 (“fiscal 2014”). As a result, the reserve for uncertain tax positions was decreased by $28.9 million in December 2016. The resolution and execution of the closing agreement in December 2016 on the open tax matters for fiscal 2012 through fiscal 2014 had a minimal impact on the Company’s effective income tax rate for fiscal 2017.
In May 2018, the Company settled its IRS examination for fiscal 2012 through fiscal 2017. As a result of the settlement, the reserve for uncertain tax positions was decreased by $27.2 million and income tax expense of $2.7 million was recorded.
The reserve as of May 31, 2018 substantially relates to the Company’s uncertain tax positions for certain federal and state income tax matters. The Company believes the reserve for uncertain tax positions, including interest and net of federal benefits, of $14.7 million as of May 31, 2018 adequately covers open tax years and uncertain tax positions up to and including fiscal 2018 for major taxing jurisdictions. As of May 31, 2018 and May 31, 2017, the entire $14.7 million and $39.2 million, respectively, of unrecognized tax benefits, including interest and net of federal benefit, if recognized, would impact the Company’s effective income tax rate.
The Company has concluded all U.S. federal income tax matters through fiscal 2017. With limited exception, state income tax audits by taxing authorities are closed through fiscal 2014, primarily due to expiration of the statute of limitations.
The Company continues to follow its policy of recognizing interest and penalties accrued on tax positions as a component of income taxes on the Consolidated Statements of Income and Comprehensive Income. The amount of accrued interest and penalties associated with the Company’s tax positions is immaterial to the Consolidated Balance Sheets. The amount of interest and penalties recognized for fiscal years 2018, 2017, and 2016 was immaterial to the Company’s results of operations.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef