INCOME TAXES

6 Months Ended

Jul. 31, 2022

INCOME TAXES

INCOME TAXES

NOTE 10 – INCOME TAXES

Income Tax Expense Reconciliations

The Company’s income tax amounts for the six months ended July 31, 2022 and 2021 differed from corresponding amounts computed by applying the federal corporate income tax rate of 21% to the income before income taxes for the periods as presented below:

	Six Months Ended July 31,
	2022		2021
Computed expected income tax expense	$	(4,970)	$	(6,635)
Difference resulting from:
State income taxes, net of federal tax effect		(349)		(719)
Research and development credits adjustment		(6,181)		—
Deferred tax adjustments		(66)		(283)
Other permanent differences and adjustments, net		(393)		(322)
Income tax expense	$	(11,959)	$	(7,959)

Foreign income tax expense amounts for the six months ended July 31, 2022 and 2021 were not material.      

Net Operating Loss (“NOL”) Carryback

In an effort to combat the adverse economic impacts of the COVID-19 crisis, the U.S. 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 included spending and tax breaks aimed at strengthening the U.S. economy and funding a nationwide effort to curtail the effects of the outbreak of COVID-19.

The tax changes of the CARES Act included a temporary suspension of the limitations on the future utilization of certain NOLs and re-established 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 (“Fiscal 2020”), which was approximately $39.5 million. The Company made the appropriate filing with the Internal Revenue Service (the “IRS”) requesting carryback refunds of income taxes paid for the years ended January 31, 2017 (“Fiscal 2017”), 2016 (“Fiscal 2016”) and 2015 in the total amount of approximately $12.7 million during the fiscal year ended January 31, 2021 (“Fiscal 2021”); the IRS has not completed the processing of the Company’s refund request.

Research and Development Tax Credits

During the year ended January 31, 2019 (“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 tax credits that may have been 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 net amount of federal and state 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. The Company recorded a corresponding liability for uncertain income tax return positions related to identified but unrecognized research and development tax credit benefits in the amount of $5.0 million. Most of this liability was included in accrued expenses as of January 31, 2022.

During Fiscal 2021, the IRS concluded examinations of the Company’s consolidated federal income tax returns for Fiscal 2016, as amended; Fiscal 2017, as amended; and the year ended January 31, 2018 (“Fiscal 2018”) with its focus on the research and development tax credits included therein.

In January 2021, the IRS issued its final revenue agents reports that documented its understanding of the facts, attempted to summarize the Company’s arguments in support of the research and development claims and stated its position which disagreed with the Company’s treatment of a substantial amount of the costs that supported the Company’s claims. In March 2021, the Company submitted a formal protest of the findings of the IRS examiner and requested an appeals hearing.

At the conclusion of the hearing that occurred in May 2022, the Company agreed to accept a settlement offer from the IRS in the amount of approximately $7.9 million, before interest. As a result, during the three-month period ended July 31, 2022, the Company made an unfavorable adjustment to its liability for uncertain income tax positions in the approximate amount of $6.2 million. This amount is also included in income tax expense for the three and six months ended July 31, 2022.

The Company has also formally protested the conclusions reached by two states, where the Company filed tax returns reflecting the benefits of certain research and development credits, that the credits are not allowable. The Company expects that any unfavorable adjustments related to the ultimate settlement of the income tax disputes with the states will not be significant.

Income Tax Refunds

As of July 31, 2022 and January 31, 2022, the balances of other current assets in the condensed consolidated balance sheet included income tax refunds receivable and prepaid income taxes in the total amounts of approximately $14.9 million and $29.5 million, respectively. The income tax refunds included the amounts that were expected to be received from the IRS upon completion of the tax return examination appeals process and the amount expected to be received from the IRS upon its processing of the Company’s NOL carryback refund request as described above.

Income Tax Returns

The Company is subject to federal and state income taxes in the U.S., and income taxes in Ireland and the U.K. 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 the end of Fiscal 2018 except for several notable exceptions including Ireland, the U.K. and several states where the open periods are one year longer.

Solar Energy Projects

The Company has invested in limited liability companies that make equity investments in solar energy projects that are eligible to receive energy tax credits, including $4.1 million that was invested during the six months ended July 31, 2021. The passive investments have been accounted for using the equity method and the balances are included in other assets in our condensed consolidated balance sheets. Each tax credit, when recognized, is recorded as a reduction of the corresponding investment balance with an offsetting reduction in the balance of accrued taxes payable in accordance with the deferral method. Investment tax credits in the approximate amount of $3.0 million were recognized during the six months ended July 31, 2021. At July 31, 2022 and January 31, 2022, the investment account balances were $1.2 million and $0.2 million, respectively. These investments are expected to provide positive overall returns over their six-year expected lives.

During the three and six months ended July 31, 2022, the investment balance was adjusted to reflect the Company’s share of the income of the investment entities in the amounts of approximately $0.5 million and $1.0 million, respectively, which amounts have been included as other income in the Company’s condensed consolidated statements of earnings for the corresponding periods.

The Company has also established deferred taxes related to the difference in the book and tax bases of the investments.

Supplemental Cash Flow Information

The amounts of cash paid for income taxes during the six months ended July 31, 2022 and 2021 were $1.3 million and $7.5 million (including the $4.1 million solar energy investment described above), respectively. The amounts of income tax refunds received during the six months ended July 31, 2022 and 2021 were not material.