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INCOME TAXES | 9 Months Ended
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Oct. 31, 2018
INCOME TAXES |
INCOME TAXES | NOTE 12 – INCOME TAXES Research and Development Tax Credits The Company has completed a detailed review of the activities of its engineering staff on major EPC services projects in order to identify and quantify the amounts of research and development credits that may be available to reduce current and prior year income taxes. This study was begun last year and focused on project costs incurred during the three-year period ended January 31, 2018. Based on the results of the study, management has identified and estimated significant amounts of income tax benefits that have not previously been recognized in the Company’s operating results for the current or any prior year reporting period. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Management considers the three-month period ended October 31, 2018 as the initial reporting period in which it had sufficient data on which to make an evaluation and reach a conclusion on the amount of income tax credit benefits related to prior year project costs that, more likely than not, qualified as research and development costs under the rules and regulations of the Internal Revenue Code of 1986, as amended (the “IRC”), and certain states. The income tax benefits associated with research and development activities conducted in prior years in the total amount of $16.5 million have been recognized in income taxes for the three and nine months ended October 31, 2018, and represented a favorable effect on dilutive earnings per share of $1.05 for each period. This net benefits amount reflects the establishment of a deferred tax valuation allowance of $0.7 million related to certain state research and development credits. The Company believes it is more likely than not that these credits will not be realized. If the benefits had been recognized in the fiscal years that the related research and development costs were incurred, which were the years ended January 31, 2016, 2017 and 2018, the income tax amounts for such years would have been favorably impacted by $0.5 million, $11.0 million and $5.0 million, respectively. The amount of income tax benefits related to qualifying research and development costs incurred for the year ending January 31, 2019 is not expected to be significant. The amount of identified but unrecognized income tax benefits related to research and development credits as of October 31, 2018 is $5.3 million, which, if recognized in the years that the related costs were incurred, would have favorably impacted income taxes for the years ended January 31, 2016, 2017 and 2018 by $0.3 million, $2.7 million and $2.3 million, respectively. As of October 31, 2018, the Company does not believe that it has any other material uncertain income tax positions reflected in its accounts. As described below, during the extended term of a current examination, the Internal Revenue Service (the “IRS”) intends to review the research and development credit that will be included in the amendment of the Company’s consolidated federal income tax return for the year ended January 31, 2016. The Company does not anticipate any significant changes to the income tax benefit amounts identified above within the next twelve months except for the addition of amounts related to research and development credits that may be available in Pennsylvania as it is an application-based state. However, such credit amounts could be material. In the future, if previously recognized tax positions no longer meet the more-likely-than-not threshold, the related benefits will be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Tax Cuts and Jobs Act (the “Tax Act”) The Tax Act was signed into law on December 22, 2017 and significantly changes tax law in the United States by, among other items, reducing the federal corporate income tax rate from a maximum of 35% to 21% (effective January 1, 2018). The Tax Act embraces a territorial system for the taxation of future foreign earnings and modifies certain business deductions by, among other changes, repealing the domestic production activities deduction, further limiting the deductibility of certain executive compensation and increasing the limitation on the deductibility of certain meals and entertainment expenses. As a result of the reduction in the corporate income tax rate, the Company revalued its deferred taxes as of December 22, 2017 and recognized an income tax benefit of $0.8 million for the year ended January 31, 2018. The Company did not record a liability as of January 31, 2018 related to transition taxes as it did not have any unremitted foreign earnings. Its foreign operations had incurred a cumulative net operating loss since the acquisition of APC in May 2015. The Company currently estimates that the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act will not have a material impact on its operating results for the year ending January 31, 2019. Nonetheless, it has included GILTI tax related to current year operations in its estimated annual effective tax rate. In the event that any new guidance related to the Tax Act is issued by the IRS or other regulatory or standard-setting bodies, the Company will conduct additional analysis and may make adjustments that could materially impact the Company’s income tax expense for the period in which such adjustments are made. Income Tax Expense Reconciliation The Company’s income tax expense amounts for the nine months ended October 31, 2018 and 2017 differed from corresponding amounts computed by applying the federal corporate income tax rates of 21% and 35%, respectively, to income before income taxes for the periods as shown in the table below.
|  | Nine Months Ended October 31,
|  | 2018 |  | 2017
Computed expected income tax expense |  | $ | (10,427) |  | $ | (36,062)
(Increase) decrease resulting from: |  |  |  |  |  |
State income taxes, net of federal tax effect |  |  | 676 |  |  | (4,633)
Federal research and development tax credits |  |  | 13,866 |  |  | —
Net operating loss benefits |  |  | 1,730 |  |  | —
Stock options |  |  | 14 |  |  | 866
Domestic production activities deduction |  |  | — |  |  | 3,036
Adjustments and other differences |  |  | (1,350) |  |  | (945)
Income tax benefit (expense) |  | $ | 4,509 |  | $ | (37,738)
The amount of state income tax benefit for the nine months ended October 31, 2018 that is presented above reflects recognized research and development state tax credit benefits of $2.7 million. Foreign income tax expense for the nine months ended October 31, 2018 was $0.5 million; the comparable amount for the nine months ended October 31, 2017 was not material. As of October 31, 2018, the balance of other current assets in the condensed consolidated balance sheet included income tax refunds offset partially by accrued income taxes in the amounts of approximately $16.5 million and $1.5 million, respectively. The income tax refunds are amounts expected to be received after the filing of amended tax returns claiming research and development tax credits in prior years. At January 31, 2018, other current assets included prepaid income taxes in the amount of $7.9 million. Income Tax Returns The Company is subject to income taxes in the United States, the Republic of Ireland, the United Kingdom and various other state and foreign jurisdictions. Tax treatments within each jurisdiction are subject to the interpretation of the related tax laws and regulations which require significant judgment to apply. The Company is no longer subject to income tax examinations by authorities for its fiscal years ended on or before January 31, 2015 except for several notable exceptions including the Republic of Ireland, the United Kingdom and several states where the open periods are one year longer. The IRS is conducting an examination of the Company’s federal consolidated tax return for the year ended January 31, 2016. As a result of conclusions reached by the IRS examiner, the Company recorded a $1.7 million income tax benefit in the quarter ended October 31, 2018 related to additional net operating losses of acquired companies that are available for the fiscal years ending January 31, 2016 through January 31, 2021. The IRS has represented to the Company that no other adjustment items were noted during the examination. However, the Company has agreed to an extension of the audit timeline so that the IRS may examine the amendment to the income tax return for the year ended January 31, 2016, reflecting the research and development credit for the year, which the Company intends to file before the end of the current fiscal year.

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- Definition 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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