Note 15—Income Taxes

On December 22, 2017, the U.S. government enacted “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”, which is commonly referred to as “The Tax Cuts and Jobs Act” (the “Tax Act”). The Tax Act reduces the U.S. federal statutory corporate tax rate from 35.0% to 21.0% effective January 1, 2018, requires companies to pay a one-time repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred (“transition tax”), and makes other changes to the U.S. income tax code. Due to the Company’s July 31 fiscal year-end, the lower corporate income tax rate is phased in, resulting in a blended U.S. federal statutory tax rate of approximately 26.9% for the Company’s fiscal 2018, and 21.0% for the Company’s fiscal years thereafter.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), expressing its views regarding Topic 740, Income Taxes, in the reporting period that includes the enactment date of the Tax Act. SAB 118 recognizes that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. Specifically, SAB 118 allows a company to report provisional estimates in the reporting period that includes the enactment date if the company does not have the necessary information available, prepared, or fully analyzed for certain income tax effects of the Tax Act. The provisional estimates would be adjusted during a measurement period not to exceed 12 months from the enactment date of the Tax Act, at which time the accounting for the income tax effects of the Tax Act is required to be completed.

As of July 31, 2018, the Company had not completed its accounting for the income tax effects of the Tax Act; however, the Company had made a reasonable estimate of the effect on its existing AMT credit carry-over and transition tax. Because the AMT credit will be refundable if not utilized in the next four years, the Company reversed the valuation allowance that offset the AMT credit. As a result, in fiscal 2018, the Company recorded a noncurrent receivable and an income tax benefit of $3.3 million for the anticipated refund. The reduction in the corporate tax rate did not impact the Company’s results of operations or financial position because the income tax benefit from the reduced rate was offset by the valuation allowance.

The transition tax is based on total post-1986 earnings and profits which were previously deferred from U.S. income taxes. In fiscal 2018, the Company has estimated that it will utilize $12 million of federal net operating loss carryforwards to offset the transition tax that it expects it will incur. The Company is currently working to complete various earnings and profits analyses to finalize its estimate. At July 31, 2018, the undistributed earnings of the Company’s foreign subsidiaries continued to be permanently reinvested. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated balance sheets and consisted of approximately $395 million at July 31, 2018. If these foreign earnings were to be distributed to the Company’s domestic entities, the Company may be subject to withholding of foreign taxes. It is impractical to determine the amount of withholding at this time, due to the numerous methods available to the Company to remit those earnings.

The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”), which were not effective until August 1, 2018. The Company did not record any impact associated with either GILTI or BEAT in fiscal 2018. The Company is reviewing the proposed guidance that was issued by the Internal Revenue Service in September 2018.

The Company anticipates that its assumptions and estimates may change as a result of future guidance and interpretation from the Internal Revenue Service, the SEC, the FASB, and various other taxing jurisdictions. In particular, the Company anticipates that the U.S. state jurisdictions will continue to determine and announce their conformity or decoupling from the Tax Act, either in its entirety or with respect to specific provisions. Legislative and interpretive actions could result in adjustments to the Company’s provisional estimates when the accounting for the income tax effects of the Tax Act is completed. The Company will continue to evaluate the impact of the Tax Act on its financial statements and will record the effect of any reasonable changes in its estimates and adjustments.

The components of income before income taxes are as follows:

Year ended July 31 (in thousands)	2018		2017			2016
Domestic	$	910	$	(3,161	)	$	11,278
Foreign		7,191		10,781			18,190
INCOME BEFORE INCOME TAXES	$	8,101	$	7,620		$	29,468

During the fiscal 2018 financial statement close, the Company determined that a revision was required to correct the disclosure of certain gross deferred tax assets of $27.9 million that were fully offset by a valuation allowance. The Company’s disclosure of the related deferred tax assets and valuation allowance balances at July 31, 2017 and 2016, and in the two years in the period ended July 31, 2017 were revised, which had no impact on the Company’s consolidated balance sheets, statements of income or statements of cash flows as previously reported.

Significant components of the Company’s deferred income tax assets consist of the following:

July 31 (in thousands)	2018			2017
Deferred income tax assets:
Bad debt reserve	$	455		$	535
Accrued expenses		3,758			7,888
Stock options and restricted stock		1,070			1,608
Charitable contributions		946			1,768
Depreciation		349			4,438
Unrealized gain		—			317
Net operating loss		75,110			122,260
Credits		—			2,899
Total deferred income tax assets		81,688			141,713
Valuation allowance		(76,020	)		(129,872	)
NET DEFERRED INCOME TAX ASSETS	$	5,668		$	11,841

In fiscal 2018, in addition to the reduction in the Company’s deferred tax assets as a result of the reduction in the corporate tax rate and the transition tax, the Company’s deferred tax assets and offsetting valuation allowance each decreased by $6 million due to the Rafael Spin-Off.

The (provision for) benefit from income taxes consists of the following:

Year ended July 31 (in thousands)	2018			2017			2016
Current:
Federal	$	3,294		$	—		$	(83	)
State and local		(34	)		(26	)		(30	)
Foreign		11			(282	)		(185	)
		3,271			(308	)		(298	)
Deferred:
Federal		—			(9,536	)		(3,148	)
State and local		12			(66	)		(51	)
Foreign		(6,185	)		11,931			(613	)
		(6,173	)		2,329			(3,812	)
(PROVISION FOR) BENEFIT FROM INCOME TAXES	$	(2,902	)	$	2,021		$	(4,110	)

The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as follows:

Year ended July 31 (in thousands)	2018			2017			2016
U.S. federal income tax at statutory rate	$	(2,186	)	$	(2,667	)	$	(10,314	)
Transition tax on foreign earnings		(3,360	)		—			—
Valuation allowance		58,798			626			—
Foreign tax rate differential		(4,272	)		3,107			6,035
Nondeductible expenses		213			457			487
Other		(23	)		64			(67	)
Prior year tax benefit (expense)		575			494			(231	)
U.S. federal tax law change		(52,631	)		—			—
State and local income tax, net of federal benefit		(16	)		(60	)		(20	)
(PROVISION FOR) BENEFIT FROM INCOME TAXES	$	(2,902	)	$	2,021		$	(4,110	)

At July 31, 2018, the Company had federal net operating loss carryforwards of approximately $153 million. These carry-forward losses are available to offset future U.S. federal taxable income. The net operating loss carryforwards will start to expire in fiscal 2018, with fiscal 2018’s loss expiring in fiscal 2038. The Company has foreign net operating losses of approximately $143 million, of which approximately $117 million does not expire, approximately $25 million expires in two to ten years and $1 million expires in twenty years. These foreign net operating losses are available to offset future taxable income in the countries in which the losses were incurred. The Company’s subsidiary, net2phone, which provides voice over Internet protocol communications services, has additional federal net operating losses of approximately $77 million, which will expire through fiscal 2027. With the reacquisition of net2phone by the Company in March 2006, its losses were limited under Internal Revenue Code Section 382 to approximately $7 million per year. The net operating losses do not include any excess benefits related to stock options or restricted stock.

The change in the valuation allowance is as follows:

Year ended July 31 (in thousands)	Balance at beginning of year		Additions charged to costs and expenses		Deductions			Balance at end of year
2018
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	129,872	$	—	$	(53,852	)	$	76,020
2017
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	130,498	$	16,017	$	(16,643	)	$	129,872
2016
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	127,449	$	3,049	$	—		$	130,498

In fiscal 2017, the Company determined that its valuation allowance on the losses of Elmion Netherlands B.V., a Netherlands subsidiary, was no longer required due to an internal reorganization that generated income and a projection of net income in future periods. The Company recorded a benefit from income taxes of $16.6 million in fiscal 2017 from the full recognition of the Elmion Netherlands B.V. deferred tax assets. In addition, in fiscal 2017, the Company determined that it would not be able to utilize its deferred tax assets in the United States and recorded a valuation allowance of $11.1 million against them.

At July 31, 2018 and 2017, the Company did not have any unrecognized income tax benefits. There were no changes in the balance of unrecognized income tax benefits in fiscal 2018, fiscal 2017 and fiscal 2016. At July 31, 2018, the Company did not expect any changes in unrecognized income tax benefits during the next twelve months. In fiscal 2018, fiscal 2017 and fiscal 2016, the Company did not record any interest and penalties on income taxes. At July 31, 2018 and 2017, there was no accrued interest included in current income taxes payable.

In September 2017, the Company, IDT Domestic Telecom, Inc. (a subsidiary of the Company) and certain other affiliates, were certified by the New Jersey Economic Development Authority as having met all of the requirements of the Grow New Jersey Assistance Act Tax Credit Program. The corporation business tax credits to be received are a maximum of $21.1 million. The Company may claim a tax credit each tax year for ten years beginning in 2018. The tax credit can be applied to 100% of the Company’s New Jersey tax liability each year, and the unused amount of the annual credit can be carried forward. In addition, the Company may apply for a tax credit transfer certificate to sell unused tax credits to another business. The tax credits must be sold for no less than 75% of the value of the tax credits. The tax credits are subject to reduction, forfeiture and recapture if, among other things, the number of full-time employees declines below the program or statewide minimum.

On June 22, 2017, the Company’s wholly-owned subsidiary IDT Telecom entered into a Share Purchase Agreement to sell the capital stock of IDTFS Holding, a company incorporated under the laws of Gibraltar and a wholly-owned subsidiary of IDT Telecom. IDTFS Holding is the sole shareholder of IDTFS, a Gibraltar-based bank and e-money issuer (see Note 3). The Company does not expect a significant difference in the tax versus book gain on the sale. Gibraltar does not tax capital gains and the Company will offset the U.S. tax gain with existing net operating losses. Tax on the sale will not impact the Company’s results of operations or financial position because the income tax benefit from the use of the net operating loss will be offset by the valuation allowance.

The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal 2015 to fiscal 2018, state and local tax returns generally for fiscal 2014 to fiscal 2018 and foreign tax returns generally for fiscal 2014 to fiscal 2018.