Income Taxes

12 Months Ended

Jul. 31, 2016

Income Taxes [Abstract]

Income Taxes

Note 15—Income Taxes

The components of income before income taxes are as follows:

Year ended July 31  (in thousands)	2016		2015		2014
Domestic	$	11,278	$	7,538	$	21,624
Foreign		18,190		84,665		3,368
INCOME BEFORE INCOME TAXES	$	29,468	$	92,203	$	24,992

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

July 31  (in thousands)	2016			2015
Deferred income tax assets:
Bad debt reserve	$	575		$	550
Accrued expenses		5,327			4,629
Stock options and restricted stock		1,802			1,030
Charitable contributions		1,527			1,277
Impairment		25,746			25,746
Depreciation		6,785			7,232
Unrealized gain		193			138
Net operating loss		122,849			125,223
Credits		3,192			2,892
Total deferred income tax assets		167,996			168,717
Valuation allowance		(158,442	)		(155,393	)
Deferred tax assets, net of valuation allowance		9,554			13,324
Deferred income tax liabilities:
Unrealized loss		42			—
NET DEFERRED INCOME TAX ASSETS	$	9,512		$	13,324

The provision for income taxes consists of the following:

Year ended July 31  (in thousands)	2016			2015			2014
Current:
Federal	$	(83	)	$	—		$	(279	)
State and local		(30	)		—			—
Foreign		(185	)		(311	)		(1,177	)
		(298	)		(311	)		(1,456	)
Deferred:
Federal		(3,148	)		(1,967	)		(6,461	)
State and local		(51	)		(245	)		(175	)
Foreign		(613	)		(3,565	)		4,110
		(3,812	)		(5,777	)		(2,526	)
PROVISION FOR INCOME TAXES	$	(4,110	)	$	(6,088	)	$	(3,982	)

In fiscal 2014, the Company determined that its valuation allowance on the losses of IDT Global, a U.K. subsidiary, were no longer required due to an internal reorganization that generated income and a projection that the income would continue. The Company recorded a benefit from income taxes of $4.1 million in fiscal 2014 from the full recognition of the IDT Global deferred tax assets.

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)	2016			2015			2014
U.S. federal income tax at statutory rate	$	(10,314	)	$	(32,271	)	$	(8,747	)
Valuation allowance		—			—			4,110
Foreign tax rate differential		6,035			25,757			961
Nondeductible expenses		487			659			761
Other		(67	)		(73	)		7
Prior year tax (expense) benefit		(231	)		—			(960	)
State and local income tax, net of federal benefit		(20	)		(160	)		(114	)
PROVISION FOR INCOME TAXES	$	(4,110	)	$	(6,088	)	$	(3,982	)

At July 31, 2016, the Company had federal and state net operating loss carryforwards of approximately $175 million. This carry-forward loss is available to offset future U.S. federal and state taxable income. The net operating loss carryforwards will start to expire in fiscal 2017, with fiscal 2016’s loss expiring in fiscal 2037. The Company has foreign net operating losses of approximately $183 million, of which approximately $114 million does not expire and approximately $69 million expires in two to nine 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 Company has not recorded U.S. income tax expense for foreign earnings, since such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings are included in accumulated deficit in the Company’s consolidated balance sheets, and consisted of approximately $324 million at July 31, 2016. Upon distribution of these foreign earnings to the Company’s domestic entities, the Company may be subject to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would be paid.

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
2016
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	155,393	$	3,049	$	—		$	158,442
2015
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	151,975	$	3,418	$	—		$	155,393
2014
Reserves deducted from deferred income taxes, net:
Valuation allowance	$	167,328	$	—	$	(15,353	)	$	151,975

The table below summarizes the change in the balance of unrecognized income tax benefits:

Year ended July 31  (in thousands)	2016		2015		2014
Balance at beginning of year	$	—	$	—	$	356
Additions based on tax positions related to the current year		—		—		—
Additions for tax positions of prior years		—		—		—
Reductions for tax positions of prior years		—		—		—
Settlements		—		—		(356	)
Lapses of statutes of limitations		—		—		—
Balance at end of year	$	—	$	—	$	—

At July 31, 2016, the Company did not have any unrecognized income tax benefits and did not expect any changes in the next twelve months. If the Company recognized any unrecognized income tax benefits, it would affect the effective tax rate. In fiscal 2016, fiscal 2015 and fiscal 2014, the Company did not record any interest and penalties on income taxes. As of July 31, 2016 and 2015, there was no accrued interest included in current income taxes payable.

In August 2016, the Company and the New Jersey Economic Development Authority entered into an incentive agreement pursuant to which the Company may receive corporation business tax credits in exchange for investment in a qualified business facility and employment of the required number of full-time employees. The corporation business tax credits to be received are a maximum of $24.3 million. The Company is required to invest $5.3 million in its building located at 520 Broad Street, Newark, New Jersey, as well as retain 528 full-time jobs and create 40 new full-time jobs in New Jersey. The Company may claim a tax credit each tax year for ten years beginning when the Economic Development Authority accepts the Company’s project completion certification. The Company must submit the project completion certification on or before December 9, 2016. 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.

The Company currently remains subject to examinations of its tax returns as follows: U.S. federal tax returns for fiscal 2013 to fiscal 2016, state and local tax returns generally for fiscal 2012 to fiscal 2016 and foreign tax returns generally for fiscal 2012 to fiscal 2016.