NOTE 13 – INCOME TAXES

The Tax Cuts and Jobs Act (the “Tax Act”)

The Tax Act was signed into law on December 22, 2017 and significantly changed tax law in the United States by, among other items, reducing the federal corporate income tax rate from a maximum of 35% to 21% (effective January 1, 2018). The Tax Act embraces a territorial system for the taxation of future foreign earnings and modifies certain business deductions by, among other changes, repealing the domestic production activities deduction, further limiting the deductibility of certain executive compensation and increasing the limitation on the deductibility of certain meals and entertainment expenses. As a result of the net reduction in the corporate income tax rate, the Company revalued its deferred taxes as of December 22, 2017 and recognized an income tax benefit of $0.8 million for Fiscal 2018.

The Company did not record a liability as of January 31, 2018 related to the transition tax as it did not have any unremitted foreign earnings. Its foreign operations had incurred a cumulative net operating loss since the acquisition of APC in May 2015. The Global Intangible Low-Taxed Income, or GILTI, provision of the Tax Act has not had a material impact on the Company’s consolidated income taxes.

The Company has not performed any accounting for income taxes related to the Tax Act based on information or regulatory guidance that it believes to be incomplete. Consequently, in the event that any new guidance related to the Tax Act is issued by the Internal Revenue Service (the “IRS”) or any other regulatory or standard-setting body, the Company will conduct additional analysis and may make adjustments that could materially impact income tax expense for the period in which such adjustments are made.

Reconciliations of Income Tax Benefit (Expense)

The components of the amounts of income tax benefit (expense) for Fiscal 2020, 2019 and 2018 are presented below:


	2020		2019		2018
Current:
Federal	$	77	$	3,603	$	(32,490)
State		336		(1,091)		(7,853)
		413		2,512		(40,343)
Deferred:
Federal		6,825		971		2
State		(185)		1,168		62
		6,640		2,139		64
Income tax benefit (expense)	$	7,053	$	4,651	$	(40,279)

Foreign income tax expense amounts for Fiscal 2020, Fiscal 2019 and 2018 were not material. The amounts of interest and penalties related to income taxes that were incurred by the Company during Fiscal 2020, 2019 and 2018 were not material.

The Company’s income tax amounts differed from corresponding amounts computed by applying the federal corporate income tax rate of 21% to the (loss) income before income taxes for Fiscal 2020 and 2019, and by applying the blended federal tax rate of approximately 34% to income before income taxes for Fiscal 2018, as shown in the table below.


	2020		2019		2018
Computed expected income tax benefit (expense)	$	10,030	$	(9,916)	$	(38,078)
Difference resulting from:
State income taxes, net of federal tax effect		81		683		(5,042)
Elimination of net operating loss benefit		(7,239)		—		—
Utilization of net operating loss carryforward		—		1,730		—
Bad debt loss		6,205		—		—
Foreign tax rate differential		(722)		86		(301)
Goodwill impairment losses		(763)		(266)		(168)
Stock options		210		32		962
Domestic production activities deduction		—		—		3,204
Other permanent differences, net		(599)		(1,319)		(973)
Federal research and development tax credits		—		13,866		—
Adjustments and other differences		(150)		(245)		117
Income tax benefit (expense)	$	7,053	$	4,651	$	(40,279)

A valuation allowance in the amount of $7.1 million was established against the deferred tax asset amount created by the net operation loss of APC’s subsidiary in the UK for Fiscal 2020. However, this effect was substantially offset by an income tax benefit (federal and state) for Fiscal 2020 in the amount of approximately $6.8 million which is the estimated favorable income tax impact of bad debt loss on certain loans made to APC from Argan, which were determined to be uncollectible during Fiscal 2020. The amount of state income tax benefit for Fiscal 2019 that is presented above reflects recognized research and development state tax credits of $2.8 million, net of federal tax-effect.

Research and Development Tax Credits

During Fiscal 2019, 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 Fiscal 2019 was $16.6 million. During Fiscal 2020, deferred tax assets related to the research and development tax credits were reduced by $0.4 million. As described below, 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 have reason to expect 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 January 31, 2020 was $5.0 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 January 31, 2020, the Company does not believe that it has any other material uncertain income tax positions reflected in its accounts.

As of January 31, 2020, the balance of other current assets in the consolidated balance sheet included income tax refunds and prepaid income taxes in the total amount of approximately $14.5 million. The income tax refunds are amounts expected to be received after the filing of the amended tax returns claiming research and development tax credits for prior years. At January 31, 2019, the consolidated balance sheet included prepaid income taxes in the amount of $19.5 million.

Deferred Taxes

The tax effects of temporary differences that are reflected in deferred tax assets as of January 31, 2020 and 2019 included the following:


	2020		2019
Assets:
Net operating loss carryforwards	$	22,683	$	8,228
Stock awards		2,367		2,188
Research and development credit carryforwards		134		631
Purchased intangibles		415		604
Accrued expenses and other		994		758
		26,593		12,409

Liabilities:
Purchased intangibles		(3,317)		(3,373)
Construction contracts		(1,618)		(454)
Property and equipment		(1,983)		(1,986)
Other		(193)		(145)
		(7,111)		(5,958)
Valuation Allowances		(11,588)		(5,194)
Deferred tax assets	$	7,894	$	1,257

The Company acquired unused net operating losses (“NOLs”) for federal income tax reporting purposes from TRC that are subject to limitations imposed by Section 382 of the Internal Revenue Code of 1986, as amended. These losses are subject to annual limits that reduce the aggregate amount of NOLs available to the Company in the future to approximately $9.5 million. These NOLs are available to offset future taxable income and, if not utilized, begin expiring during 2032.

The Company incurred an NOL for federal income tax reporting purposes in the total amount of $38.5 million for Fiscal 2020, including the amount of the aforementioned bad debt loss. Pursuant to the Tax Act, this NOL amount may be carried forward indefinitely, however, its utilization will be limited to 80% of taxable income in any tax year.

The Company also has certain NOLs that will be available to the Company for state income tax reporting purposes that are substantially similar to the federal NOLs.

The Company’s ability to realize deferred tax assets, including those related to the NOLs discussed above, depends primarily upon the generation of sufficient future taxable income to allow for the Company’s use of temporarily deferred deductions and tax planning strategies. If such estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against some or all of its deferred tax assets resulting in additional income tax expense in the future. At this time, based substantially on the strong earnings performance of the Company’s power industry services reporting segment, management believes that it is more likely than not that the Company will realize the benefit of significantly all of its deferred tax assets.

Income Tax Returns

The Company is subject to income taxes in the US, the Republic of Ireland, the UK 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 UK 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.

Supplemental Cash Flow Information

The amounts of cash paid for income taxes during the years ended January 31, 2020, 2019 and 2018 were $3.1 million, $3.9 million and $44.3 million, respectively. During the year ended January 31, 2020, the Company received cash refunds of previously paid income taxes from various taxing authorities in the total amount of $8.4 million. No meaningful amounts of refunds were received in either Fiscal 2019 or Fiscal 2018.