NOTE 11 – INCOME TAXES

Income Tax Expense Reconciliation

The Company’s income tax amounts for the nine months ended October 31, 2019 and 2018 differed from corresponding amounts computed by applying the federal corporate income tax rate of 21% to loss or income before income taxes for the periods as shown in the table below.


	Nine Months Ended October 31,
	2019		2018
Computed expected income tax benefit (expense)	$	8,070	$	(10,427)
Differences resulting from:
State income taxes, net of federal tax effect		185		676
Federal research and development credits		—		13,866
Net operating loss deemed unrealizable		(6,280)		1,730
Bad debt loss		5,026		—
Foreign tax differential		(766)		—
Adjustments and other permanent differences		(1,299)		(1,336)
Income tax benefit	$	4,936	$	4,509

Foreign income tax expense amounts for the nine months ended October 31, 2019 and 2018 were not material. As presented above, a valuation allowance in the amount of $6.3 million was established against the deferred tax asset amount created by the net operation loss of APC’s subsidiary in the United Kingdom for the nine months ended October 31, 2019. However, this effect was substantially offset by an income tax benefit (federal and state) for the nine months ended October 31, 2019 in the amount of approximately $5.9 million which is the estimated favorable income tax impact of bad debt loss on loans made to APC from Argan, which were determined to be uncollectible during the nine-month period ended October 31, 2019.

Research and Development Tax Credits

During the three-month period ended October 31, 2018, the Company 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 prior year income taxes. This study focused on project costs incurred during the three-year period ended January 31, 2018. Based on the results of the study, management identified and estimated significant amounts of income tax benefits that were not previously recognized in the Company’s operating results for any prior year reporting period. The amount of research and development tax credit benefit recognized in the consolidated financial statements last year was $16.6 million, which amount is before an unfavorable adjustment recorded in the nine-month period ended October 31, 2019 in the amount of $0.4 million. As described below, the Internal Revenue Service (the “IRS”) is examining the research and development credits that were included in the amendments of the Company’s consolidated federal income tax returns for the years ended January 31, 2016 and 2017 that were filed in January 2019. The Company does not anticipate any significant unfavorable changes to its income taxes to arise from the completion of these examinations.

The amount of identified but unrecognized income tax benefits related to research and development credits as of October 31, 2019 was $4.9 million, for which the Company has established a liability for uncertain income tax return positions, most of which is included in accrued expenses. The amount of the liability was $5.1 million as of January 31, 2019. The final outcome of these uncertain tax positions is not yet determinable. However, the Company does not expect that the amount of unrecognized tax benefits will significantly change due to any settlement and/or expiration of statutes of limitation over the next 12 months. As of October 31, 2019, the Company does not believe that it has any other material uncertain income tax positions reflected in its accounts.

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, 2016 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 conducted an examination of the Company’s original federal consolidated income tax return for the year ended January 31, 2016. The IRS represented to the Company that no unfavorable adjustment items were noted during the examination. However, the Company has consented to an extension of the audit timeline which will enable the IRS to examine the amendment to the income tax return, which includes the research and development credit for the year. In addition, the IRS has commenced an examination of the Company’s amended consolidated income tax return for the year ended January 31, 2017. To date, the Company has provided supporting documentation related to the credits and written responses to certain questions as requested by the IRS. No audit findings have been communicated to the Company yet.

At October 31 and January 31, 2019, the amounts of other current assets presented in the condensed consolidated balance sheets included income tax refunds and prepaid income taxes in the combined amounts of $14.9 million and $19.5 million, respectively. The income tax refunds are amounts expected to be received from taxing authorities based on the amended tax returns claiming research and development tax credits in prior years.