INCOME TAXES

9 Months Ended

Oct. 31, 2020

INCOME TAXES

INCOME TAXES

NOTE 10 – INCOME TAXES

Income Tax Expense Reconciliation

The Company’s income tax amounts for the nine months ended October 31, 2020 and 2019 differed from corresponding amounts computed by applying the federal corporate income tax rate of 21% to the income (loss) before income taxes for the periods as presented in the table below.

	Nine Months Ended October 31,
	2020		2019
Computed expected income tax (expense) benefit	$	(2,702)	$	8,070
Difference resulting from:
Net operating loss carryback		4,390		—
Foreign tax rate differential		(77)		(766)
Stock options		66		(170)
State income taxes, net of federal tax effect		(40)		185
Net operating losses deemed unrealizable		—		(6,280)
Bad debt loss		—		5,026
Adjustments and other differences		(246)		(1,129)
Income tax benefit	$	1,391	$	4,936

Foreign income tax expense amounts for the nine months ended October 31, 2020 and 2019 were not material. A valuation allowance in the amount of $6.3 million was established against the deferred tax asset amount created by the net operating loss of APC’s subsidiary in the UK for the nine months ended October 31, 2019. As  the subsidiary is expected to report income for the current year, approximately $0.1 of tax benefit was recorded during the nine-month period ended October 31, 2020.

Net Operating Loss Carryback

In an effort to combat the adverse economic impacts of the COVID-19 crisis, the US Congress passed the Coronavirus, Aid, Relief, and Economic Security Act ( the “CARES Act”) that was signed into law on March 27, 2020. This wide-ranging legislation was an emergency economic stimulus package that includes spending and tax breaks aimed at strengthening the US economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19. The CARES Act has provided many opportunities for taxpayers to evaluate their 2018 and 2019 income tax returns to identify potential tax refunds. One such area is the utilization of net operating losses (“NOLs”). The tax changes of the CARES Act remove the limitations on the future utilization of certain NOLs and re-establish a carryback period for certain losses to five years. The NOLs eligible for carryback under the CARES Act include the Company’s domestic NOL for the year ended January 31, 2020, which was approximately $39.5 million. Substantially all of this loss now may be carried back for application against the Company’s taxable income for the year ended January 31, 2015.

As the carryback of the NOL was not available until the current fiscal year, the tax benefit associated with the NOL for Fiscal 2020 was recorded in deferred tax assets as of January 31, 2020 in the amount of $8.3 million. With the enactment of the CARES Act, the asset was moved to income taxes receivable (included in other current assets in the condensed consolidated financial statements as of October 31, 2020) with a value of approximately $12.7 million. The carryback provides a favorable rate benefit for the Company as the loss, which  was incurred in a year where the statutory federal tax rate was 21%, will be carried back to a tax year where the tax rate was higher. The substantial portion of the net amount of this tax benefit, which is approximately $4.4 million, was recorded in the three-month period ended April 30, 2020 and is, therefore, reflected as income tax benefit in the results for the nine-month period ended October 31, 2020.

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 during the fourth quarter of Fiscal 2019 was $16.2 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 amount of identified but unrecognized income tax benefits related to research and development credits as of October 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 also $5.0 million as of January 31, 2020. 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 October 31, 2020, the Company does not believe that it has any other material uncertain income tax positions reflected in its accounts.

As of October 31 and January 31, 2020, the balances of other current assets in the condensed consolidated balance sheets included income tax refunds and prepaid income taxes in the net amounts of approximately $27.3 million and $14.5 million, respectively. The substantial portions of the income tax refunds are expected to be collected after the completion of the federal tax return examinations described below and the filing of the refund request related to the NOL carryback described above.

Income Tax Returns

The Company is subject to federal and state income taxes in the US, and income taxes in Ireland and the UK. 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 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 this examination. However, the Company has consented to an extension of the audit timeline which is enabling the IRS to also examine the amendment to the income tax return, which includes the research and development credit for the year. In addition, the IRS opened an examination of the Company’s amended consolidated income tax return for the year ended January 31, 2017. In substance, these efforts have evolved into a simultaneously conducted examinations of the research and development credits claimed in both years.

In October 2020, the Company received an initial draft communication from the IRS that documents its understanding of the facts, attempts to summarize the Company’s arguments in support of the claims and states its position which disagrees with the Company’s treatment of certain costs. After a careful review of the draft communication, the Company has concluded that its arguments are sound, that the draft information does not represent new facts relating to the issues and that it will not make any adjustments to its accounting for the research and development claims (that is discussed above) as of October 31, 2020. The Company intends to pursue its income tax position with the IRS, and it expects that the ultimate settlement of the disagreement will be resolved on a basis favorable to the Company.

Subsequent to October 31, 2020, the Company was notified by the IRS that it intended to examine the consolidated income tax return for the year ended January 31, 2018, with a most likely focus on the research and development credit claimed therein. The Company believes that any resulting disagreements regarding its income taxes for the year ended January 31, 2018 will be resolved on a basis favorable to the Company.

Supplemental Cash Flow Information

The amounts of cash paid for income taxes during the nine months ended October 31, 2020 and 2019 were $3.8 million and $3.1 million, respectively. During the nine months ended October 31, 2020 and 2019, the Company received cash refunds of previously paid income taxes from various taxing authorities in the total amounts of $0.9 million and $7.9 million, respectively.