15.INCOME TAXES

Our benefit (provision) for income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2017		2016		2015
Current:
Federal	$	69	$	(380)	$	(220)
State		(71)		(197)		(208)
Foreign		(2,320)		(2,553)		(2,691)
		(2,322)		(3,130)		(3,119)

Deferred:
Federal		(1,227)		(1,584)		(3,239)
State		(17)		70		(138)
Foreign		468		50		200
Operating loss carryforward		6,964		-		-
Valuation allowance		(129)		(301)		-
		6,059		(1,765)		(3,177)
	$	3,737	$	(4,895)	$	(6,296)

The allocation of our total income tax provision (benefit) is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2017		2016		2015
Net income (loss)	$	3,737	$	(4,895)	$	(6,296)
Other comprehensive income		37		115		52
	$	3,774	$	(4,780)	$	(6,244)

Income (loss) before income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2017		2016		2015
United States	$	(10,126)	$	9,328	$	15,073
Foreign		(783)		2,583		2,339
	$	(10,909)	$	11,911	$	17,412

The differences between income taxes at the statutory federal income tax rate and the consolidated income tax rate reported in our consolidated statements of operations were as follows:


YEAR ENDED AUGUST 31,	2017	2016	2015
Federal statutory income tax rate	35.0%	(35.0)%	(35.0)%
State income taxes, net of federal effect	2.3	(1.9)	(2.3)
Valuation allowance	(1.2)	(2.5)	-
Foreign jurisdictions tax differential	(1.9)	0.6	(1.2)
Tax differential on income subject to both U.S. and foreign taxes	0.4	(1.9)	(0.5)
Effect of claiming foreign tax credits instead of deductions for prior years	-	-	3.2
Uncertain tax positions	4.4	0.4	0.9
Non-deductible executive compensation	(1.6)	-	(0.2)
Non-deductible meals and entertainment	(2.2)	(1.6)	(1.1)
Other	(0.9)	0.8	-
	34.3%	(41.1)%	(36.2)%

In prior fiscal years, we elected to take deductions on our U.S. federal income tax returns for foreign income taxes paid, rather than claiming foreign tax credits. During those years we either generated or used net operating loss carryforwards and were therefore unable to utilize foreign tax credits. In fiscal 2011, we began claiming foreign tax credits on our U.S. federal income tax returns. Although we could not utilize the credits we claimed for fiscal 2012 and fiscal 2011 in those respective years, we concluded it was more likely than not that these foreign tax credits will be utilized in the future.

Our overall U.S. taxable income and foreign source income for fiscal 2014 and 2013 were sufficient to utilize all of the foreign tax credits generated during those fiscal years, plus additional credits generated in prior years. Accordingly, we amended our U.S. federal income tax returns from fiscal 2003 through fiscal 2010 to claim foreign tax credits instead of foreign tax deductions. In fiscal 2015, we finalized the calculations of the impact of amending previously filed federal income tax returns to realize foreign tax credits previously treated as expired under the tax positions taken in the original returns. The income tax benefit recognized from these foreign tax credits totaled $0.6 million in fiscal 2015.

We recognized tax benefits from deductions for stock-based compensation in excess of the corresponding expense recorded for financial statement purposes. Instead of reducing our income tax expense for these benefits, we recorded $0.2 million and $0.1 million for the fiscal years ending August 31, 2017 and 2015. Tax expense related to stock-based compensation recorded in additional paid-in capital for fiscal 2016 was insignificant. Following the adoption of ASU 2016-09 in fiscal 2018, the benefits and deductions resulting from stock-based compensation in excess of the corresponding book expense will be recorded as a component of our income tax provision or benefit for the period.

The significant components of our deferred tax assets and liabilities were comprised of the following (in thousands):



AUGUST 31,		2017		2016
Deferred income tax assets:
Net operating loss carryforward	$	10,310	$	-
Sale and financing of corporate
headquarters		8,420		9,013
Foreign income tax credit
carryforward		4,382		2,784
Stock-based compensation		2,954		2,674
Inventory and bad debt reserves		1,643		1,147
Bonus and other accruals		1,574		1,017
Deferred revenue		510		405
Other		337		617
Total deferred income tax assets		30,130		17,657
Less: valuation allowance		(612)		(301)
Net deferred income tax assets		29,518		17,356

Deferred income tax liabilities:
Intangibles step-ups – indefinite lived		(8,539)		(8,528)
Intangibles step-ups – definite lived		(7,607)		(6,003)
Intangible asset impairment and
amortization		(4,875)		(4,505)
Property and equipment depreciation		(4,960)		(3,367)
Deferred commissions		(2,195)		-
Unremitted earnings of foreign
subsidiaries		(492)		(574)
Other		(236)		(399)
Total deferred income tax liabilities		(28,904)		(23,376)
Net deferred income taxes	$	614	$	(6,020)

Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):



AUGUST 31,		2017		2016
Other long-term assets	$	1,647	$	650
Long-term liabilities		(1,033)		(6,670)
Net deferred income tax liability	$	614	$	(6,020)

As of August 31, 2016, we had utilized all of our U.S. federal net operating loss carryforwards. However, we incurred a federal net operating loss of $17.5 million in fiscal 2017 and acquired a federal net operating loss carryforward of $7.7 million in connection with the purchase of the stock of Jhana Education (Note 2) in fiscal 2017. Our U.S. federal net operating loss carryforwards were comprised of the following at August 31, 2017 (in thousands):



	Loss Carryforward				Loss		Loss		Operating
Loss Carryforward	Expires				Deductions		Deductions		Loss Carried
for Year Ended	August 31,		Amount		in Prior Years		in Current Year		Forward
December 31, 2012	2031	$	243	$	-	$	-	$	243
December 31, 2013	2032		553		-		-		553
December 31, 2014	2033		1,285		-		-		1,285
December 31, 2015	2034		1,491		-		-		1,491
December 31, 2016	2035		3,052		-		-		3,052
July 15, 2017	2036		1,117		-		-		1,117
Acquired NOL			7,741		-		-		7,741
August 31, 2017	2037		17,500		-		-		17,500
		$	25,241	$	-	$	-	$	25,241

We have U.S. state net operating loss carryforwards generated in fiscal 2009 and before in various jurisdictions that expire primarily between September 1, 2017 and August 31, 2029. The U.S. state net operating loss carryforwards generated in fiscal 2017 primarily expire on August 31, 2037. The state net operating loss carryforwards acquired through the purchase of Jhana Education stock expire between August 31, 2031 and August 31, 2036.

Our U.S. foreign income tax credit carryforwards were comprised of the following at August 31, 2017 (in thousands):



Credit Generated in					Credits Used		Credits Used		Credits
Fiscal Year Ended	Credit Expires		Credits		in Prior		in Fiscal		Carried
August 31,	August 31,		Generated		Years		2017		Forward
2011	2021	$	3,445	$	(859)	$	-	$	2,586
2012	2022		2,563		(2,563)		-		-
2013	2023		2,815		(2,815)		-		-
2014	2024		1,378		(1,378)		-		-
2015	2025		1,422		(1,422)		-		-
2016	2026		1,569		(1,569)		-		-
2017	2027		1,796		-		-		1,796
		$	14,988	$	(10,606)	$	-	$	4,382

During the year ended August 31, 2016, we determined it was more likely than not that deferred tax assets of a foreign subsidiary would not be realized. Accordingly, we recorded a $0.3 million valuation allowance against these deferred tax assets in fiscal 2016. During fiscal 2017, we increased this valuation allowance by $0.1 million to $0.4 million, which reduced our income tax benefit for the year by $0.1 million.

We acquired federal and state net operating loss carryforwards in connection with the purchase of Jhana Education stock during fiscal 2017. Section 382 of the Internal Revenue Code limits our ability to use these acquired losses. Accordingly, we recorded valuation allowances in the amount of $0.2 million against the related deferred tax assets. Our income tax benefit for fiscal 2017 was unaffected by this valuation allowance.

We have determined that projected future taxable income is adequate to allow for realization of all deferred tax assets, except for the assets subject to the valuation allowances. We considered sources of taxable income, including future reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. Based on the factors described above, we concluded that realization of our deferred tax assets, except those subject to the valuation allowance as described above, is more likely than not at August 31, 2017.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2017		2016		2015
Beginning balance	$	3,024	$	3,115	$	3,491
Additions based on tax positions
related to the current year		10		199		244
Additions for tax positions in
prior years		85		3		144
Reductions for tax positions of prior
years resulting from the lapse of
applicable statute of limitations		(634)		(212)		(339)
Other reductions for tax positions of
prior years		(126)		(81)		(425)
Ending balance	$	2,359	$	3,024	$	3,115

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.6 million at August 31, 2017, and $2.1 million at August 31, 2016. Included in the ending balance of gross unrecognized tax benefits at August 31, 2017 is $2.4 million related to individual states’ net operating loss carryforwards. Interest and penalties related to uncertain tax positions are recognized as components of income tax expense. The net accruals and reversals of interest and penalties increased or decreased our income tax expense by an insignificant amount in each of fiscal 2017, fiscal 2016 and fiscal 2015. The balance of interest and penalties included in other liabilities on our consolidated balance sheets at August 31, 2017 and 2016 was $0.3 million at each date.

During the next 12 months, we expect a decrease in unrecognized tax benefits totaling $0.2 million relating to state net operating loss deductions upon the lapse of the applicable statute of limitations.

We file United States federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The tax years that remain subject to examinations for our major tax jurisdictions are shown below.

2010-2017	Canada and Australia
2012-2017	Japan and the United Kingdom
2013-2017	United States – state and local income tax
2014-2017	United States – federal income tax
2016-2017	China
2017	Singapore