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Income Taxes | 12 Months Ended
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Aug. 31, 2022
Income Taxes [Abstract] |
Income Taxes | 14. INCOME TAXES Our benefit (provision) for income taxes consisted of the following (in thousands):
YEAR ENDED |  |  |  |  |  |  |  |
AUGUST 31, |  | 2022 |  |  | 2021 |  |  | 2020
Current: |  |  |  |  |  |  |  |
Federal | $ | - |  | $ | - |  | $ | (15)
State |  | (1,221) |  |  | (286) |  |  | (87)
Foreign |  | (2,202) |  |  | (1,773) |  |  | (1,145)
|  | (3,423) |  |  | (2,059) |  |  | (1,247)
Deferred: |  |  |  |  |  |  |  |
Federal |  | (9,339) |  |  | 2,869 |  |  | 2,306
State |  | (889) |  |  | 13 |  |  | 98
Foreign |  | 24 |  |  | 24 |  |  | (77)
Operating loss carryforward |  | 7,150 |  |  | (3,058) |  |  | (50)
Valuation allowance |  | 2,845 |  |  | 10,546 |  |  | (11,261)
Foreign tax credit carryforward |  |  |  |  |  |  |  |
reduction |  | (2) |  |  | (787) |  |  | -
|  | (211) |  |  | 9,607 |  |  | (8,984)
| $ | (3,634) |  | $ | 7,548 |  | $ | (10,231)
The allocation of our total income tax benefit (provision) is as follows (in thousands):
YEAR ENDED |  |  |  |  |  |  |  |
AUGUST 31, |  | 2022 |  |  | 2021 |  |  | 2020
Net income (loss) | $ | (3,634) |  | $ | 7,548 |  | $ | (10,231)
Other comprehensive income (loss) |  | 176 |  |  | 11 |  |  | 16
| $ | (3,458) |  | $ | 7,559 |  | $ | (10,215)
Income (loss) before income taxes consisted of the following (in thousands):
YEAR ENDED |  |  |  |  |  |  |  |
AUGUST 31, |  | 2022 |  |  | 2021 |  |  | 2020
United States | $ | 21,152 |  | $ | 6,834 |  | $ | 3,062
Foreign |  | 912 |  |  | (759) |  |  | (2,266)
| $ | 22,064 |  | $ | 6,075 |  | $ | 796
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 and comprehensive income (loss) were as follows:
YEAR ENDED |  |  |  |  |  |  |  |  |
AUGUST 31, |  | 2022 |  |  | 2021 |  |  | 2020 |
Federal statutory income tax rate |  | (21.0) | % |  | (21.0) | % |  | (21.0) | %
State income taxes, net of federal effect |  | (3.9) |  |  | (1.6) |  |  | 16.9 |
Valuation allowance |  | 12.9 |  |  | 173.6 |  |  | (1,412.9) |
Foreign tax credit carryforward |  |  |  |  |  |  |  |  |
reduction |  | - |  |  | (13.0) |  |  | - |
Executive stock options |  | - |  |  | 7.7 |  |  | 199.9 |
Foreign jurisdictions tax differential |  | (1.1) |  |  | (4.0) |  |  | 1.4 |
Tax differential on income subject |  |  |  |  |  |  |  |  |
to both U.S. and foreign taxes |  | (0.2) |  |  | (0.7) |  |  | 11.9 |
Uncertain tax positions |  | (0.8) |  |  | (3.0) |  |  | 13.8 |
Non-deductible executive compensation |  | (5.5) |  |  | (5.8) |  |  | (18.2) |
Non-deductible meals and entertainment |  | (0.1) |  |  | (0.2) |  |  | (22.3) |
Other stock-based compensation |  | 2.5 |  |  | - |  |  | - |
Payout of deferred compensation (NQDC) |  | - |  |  | - |  |  | 6.1 |
Other |  | 0.7 |  |  | (7.8) |  |  | (59.3) |
|  | (16.5) | % |  | 124.2 | % |  | (1,283.7) | %
Our effective income tax expense rate for fiscal 2022 of 16.5 percent was lower than the statutory tax rate primarily due to a $2.8 million decrease in the valuation allowance against our deferred income tax assets and a $0.6 million benefit for share-based compensation deductions in excess of the corresponding book expense. These tax benefits were partially offset by tax expense of $1.2 million for non-deductible executive compensation. Our effective income tax benefit rate for fiscal 2021 of 124.2 percent was primarily due to a $10.5 million reduction in our valuation allowance against deferred income tax assets, which was partially offset by the reduction of $0.8 million in foreign tax credit carryforwards resulting from tax withheld by foreign jurisdictions in excess of amounts allowable as credits against our U.S. income taxes. In fiscal 2020, as explained below, we recognized $11.3 million of additional income tax expense resulting from the increase in the valuation allowance against our deferred tax assets. Due to the near break-even amount of pre-tax income during fiscal 2020, the effect of non-temporary items on our effective income tax rate was greatly amplified. In consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the prior three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards. Based on this assessment, we increased the valuation allowance against our deferred tax assets, which generated $11.3 million of additional income tax expense in fiscal 2020. Our strong financial performance during fiscal 2021 produced cumulative three-year pre-tax income through August 31, 2021. Because of better-than-expected earnings during fiscal 2021, as well as a favorable outlook for future earnings, particularly from sales of our All Access Pass, we reduced the valuation allowance against our deferred tax assets by $10.5 million during fiscal 2021. In fiscal 2022, we reduced the valuation allowance against our deferred tax assets by $2.8 million, due primarily to foreign tax credits claimed on our fiscal 2021 U.S. federal income tax return which we previously concluded would expire unused. We are subject to the anti-deferral provisions on Global Intangible Low-Taxed Income (GILTI) under the Tax Cut and Jobs Act of 2017. We have elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the Period Cost Method). We recorded an insignificant amount of income tax expense in fiscal 2022 and no income tax expense in fiscal 2021 or fiscal 2020 under the GILTI provisions. During fiscal 2019, we recorded income tax expense of $0.3 million under GILTI. However, IRS guidance issued after we filed our fiscal 2019 federal income tax return allowed us to amend the return and reverse the GILTI tax previously recorded. Accordingly, we recorded a $0.3 million benefit for this reversal during fiscal 2021. On August 16, 2022, President Biden signed the Inflation Reduction Act, which includes a new 15 percent corporate minimum tax on certain large corporations and a one percent excise tax on stock repurchases made after December 31, 2022. We do not anticipate this legislation will have a material impact on our consolidated financial statements. The significant components of our deferred tax assets and liabilities were as follows (in thousands):
AUGUST 31, |  | 2022 |  |  | 2021
Deferred income tax assets: |  |  |  |  |
Net operating loss carryforward | $ | 11,334 |  | $ | 5,986
Foreign income tax credit |  |  |  |  |
carryforward |  | 4,096 |  |  | 9,466
Sale and financing of corporate |  |  |  |  |
headquarters |  | 2,638 |  |  | 3,307
Stock-based compensation |  | 2,503 |  |  | 2,022
Bonus and other accruals |  | 2,094 |  |  | 2,483
Deferred revenue |  | 1,596 |  |  | 1,075
Inventory and bad debt reserves |  | 1,533 |  |  | 1,551
Other |  | 605 |  |  | 653
Total deferred income tax assets |  | 26,399 |  |  | 26,543
Less: valuation allowance |  | (1,685) |  |  | (4,530)
Net deferred income tax assets |  | 24,714 |  |  | 22,013
Deferred income tax liabilities: |  |  |  |  |
Intangibles step-ups – indefinite lived |  | (5,478) |  |  | (5,461)
Intangibles step-ups – finite lived |  | (3,186) |  |  | (4,008)
Intangible asset impairment and |  |  |  |  |
amortization |  | (3,851) |  |  | (3,537)
Self-constructed tangible assets |  | (3,811) |  |  | -
Deferred commissions |  | (3,187) |  |  | (2,784)
Unremitted earnings of foreign |  |  |  |  |
subsidiaries |  | (388) |  |  | (646)
Property and equipment depreciation |  | (326) |  |  | (1,001)
Total deferred income tax liabilities |  | (20,227) |  |  | (17,437)
Net deferred income taxes | $ | 4,487 |  | $ | 4,576
‎ Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):
AUGUST 31, |  | 2022 |  |  | 2021
Long-term assets | $ | 4,686 |  | $ | 4,951
Long-term liabilities |  | (199) |  |  | (375)
Net deferred income tax asset | $ | 4,487 |  | $ | 4,576
Our U.S. federal net operating loss carryforwards were comprised of the following at August 31, 2022 (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
Acquired NOL - Jhana |  |  |  |  |  |  |  |  |  |
December 31, 2015 |  | 2034 | $ | 1,491 | $ | (1,428) | $ | - | $ | 63
December 31, 2016 |  | 2035 |  | 3,052 |  | - |  | - |  | 3,052
July 15, 2017 |  | 2036 |  | 1,117 |  | - |  | - |  | 1,117
|  |  |  | 5,660 |  | (1,428) |  | - |  | 4,232
Acquired NOL - Strive |  |  |  |  |  |  |  |  |  |
December 31, 2018 |  | No Expiration |  | 947 |  | (295) |  | - |  | 652
December 31, 2019 |  | No Expiration |  | 869 |  | - |  | - |  | 869
December 31, 2020 |  | No Expiration |  | 1,133 |  | - |  | - |  | 1,133
April 25, 2021 |  | No Expiration |  | 553 |  | - |  | - |  | 553
|  |  |  | 3,502 |  | (295) |  | - |  | 3,207
August 31, 2022 |  | No Expiration |  | 30,675 |  | - |  | - |  | 30,675
|  |  | $ | 39,837 | $ | (1,723) | $ | - | $ | 38,114
Certain operating loss carryforwards in the table above were obtained through the fiscal 2017 acquisition of Jhana Education (Jhana) and the fiscal 2021 acquisition of Strive (Note 3). We have U.S. state net operating loss carryforwards generated in fiscal 2009 and before in various jurisdictions that expire primarily between September 1, 2022 and August 31, 2029. The U.S. state net operating loss carryforwards generated in fiscal 2017 and fiscal 2018 primarily expire on August 31, 2037 and 2038, respectively. The state net operating loss carryforwards acquired through the purchase of Jhana stock expire between August 31, 2034 and August 31, 2036. The state net operating loss carryforwards acquired through the purchase of Strive stock expire between August 31, 2038 and August 31, 2041. The state net operating loss carryforwards generated in fiscal 2022 primarily expire on August 31, 2042. Our U.S. foreign income tax credit carryforwards were comprised of the following at August 31, 2022 (in thousands):
Credit Generated in |  |  |  |  |  | Credits Used |  | Credits |  | Credits Used |  | Credits
Fiscal Year Ended |  | Credit Expires |  | Credits |  | in Prior |  | Reduced in |  | in Current |  | Carried
August 31, |  | August 31, |  | Generated |  | Years |  | Current Year |  | Year |  | Forward
2018 |  | 2028 | $ | 1,727 | $ | (967) | $ | - | $ | - | $ | 760
2019 |  | 2029 |  | 1,578 |  | (234) |  | - |  | - |  | 1,344
2020 |  | 2030 |  | 1,010 |  | (147) |  | - |  | - |  | 863
2022 |  | 2032 |  | 1,129 |  | - |  | - |  | - |  | 1,129
|  |  | $ | 5,444 | $ | (1,348) | $ | - | $ | - | $ | 4,096
As previously explained, during fiscal 2020 we significantly increased the valuation allowance on our deferred income tax assets. During fiscal 2021 we reversed nearly all of the valuation allowance amounts that we recorded in 2020. The remaining valuation allowance at August 31, 2021 related primarily to the foreign tax credit carryforward from fiscal 2011, which we expected to expire in fiscal 2022, and losses of certain foreign subsidiaries. During fiscal 2022 we were able to utilize the foreign tax credit carryforward from 2011, and the remaining valuation allowance at August 31, 2022 relates primarily to the losses of certain foreign subsidiaries, which we expect will expire. Activity in our deferred income tax asset valuation allowance was as follows for the periods indicated (in thousands):
YEAR ENDED |  |  |  |  |  |  |  |
AUGUST 31, |  | 2022 |  |  | 2021 |  |  | 2020
Beginning balance | $ | 4,530 |  | $ | 15,076 |  | $ | 3,815
Charged to costs and expenses |  | 683 |  |  | 394 |  |  | 11,269
Deductions |  | (3,528) |  |  | (10,940) |  |  | (8)
Ending balance | $ | 1,685 |  | $ | 4,530 |  | $ | 15,076
Except for the deferred tax assets subject to valuation allowances, we have determined that projected future taxable income is adequate to allow for realization of all deferred tax assets. We considered sources of taxable income, including 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 allowances described above, is more likely than not at August 31, 2022. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
YEAR ENDED |  |  |  |  |  |  |  |
AUGUST 31, |  | 2022 |  |  | 2021 |  |  | 2020
Beginning balance | $ | 1,594 |  | $ | 1,640 |  | $ | 1,895
Additions based on tax positions |  |  |  |  |  |  |  |
related to the current year |  | 77 |  |  | 349 |  |  | 172
Additions for tax positions in |  |  |  |  |  |  |  |
prior years |  | 207 |  |  | 79 |  |  | 10
Reductions for tax positions of prior |  |  |  |  |  |  |  |
years resulting from the lapse of |  |  |  |  |  |  |  |
applicable statute of limitations |  | - |  |  | (188) |  |  | (289)
Other reductions for tax positions of |  |  |  |  |  |  |  |
prior years |  | (281) |  |  | (286) |  |  | (148)
Ending balance | $ | 1,597 |  | $ | 1,594 |  | $ | 1,640
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.3 million at each of August 31, 2022 and 2021. Included in the ending balance of gross unrecognized tax benefits at August 31, 2022 is $1.6 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 our income tax expense by $0.1 million in fiscal 2022 and had an insignificant effect on our income taxes in each of fiscal 2021 and fiscal 2020. The balance of interest and penalties included in other long-term liabilities on our consolidated balance sheets was $0.3 million on August 31, 2022 and $0.2 million on August 31, 2021. During the next 12 months, we expect an immaterial change in unrecognized tax benefits. 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.
2015-2022 | Australia, Canada, and Japan
2016-2022 | China
2017-2022 | Germany, Switzerland, and Austria
2018-2022 | United Kingdom, Singapore
2018-2022 | United States – state and local income tax
2019-2022 | United States – federal income tax

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