INCOME TAXES

12 Months Ended

Mar. 31, 2020

Income (loss) before income tax expense (benefit) consisted of the following (in thousands):


	Year Ended March 31,
	2020		2019		2018
Domestic	$	(1,502)	$	(107,088)	$	(35,032)
Foreign	3,426		14,176		16,373
	$	1,924	$	(92,912)	$	(18,659)

The components of the income tax expense (benefit) are as follows (in thousands):


	Year Ended March 31,
	2020		2019		2018
Current income tax expense:
Federal	$	2,817	$	3,902	$	14,191
State	1,850		(136)		1,925
Foreign	9,712		10,618		12,249
	14,379		14,384		28,365
Deferred income tax benefit:
Federal	(5,287)		(25,347)		(113,122)
State	(2,897)		(3,845)		(10,037)
Foreign	(1,517)		(4,780)		(3,677)
	(9,701)		(33,972)		(126,836)
	$	4,678	$	(19,588)	$	(98,471)

The income tax expense (benefit) computed using the federal statutory income tax rate differs from NetScout's effective tax rate primarily due to the following:


	Year Ended March 31,
	2020		2019		2018
Statutory U.S. federal tax rate	21.0	%	21.0	%	31.6	%
State taxes, net of federal tax effect	(47.8)		3.4		6.9
Research and development tax credits	(245.9)		7.1		39.5
Effect of foreign operations	(66.9)		(0.1)		14.0
Meals and entertainment	43.7		(1.0)		(6.7)
Domestic production activities deduction	—		—		13.8
Change in valuation allowance	250.0		2.2		(0.2)
Internal restructuring charges	196.5		—		—
Stock compensation	172.1		(2.6)		(2.5)
Divestiture	—		(1.0)		—
GILTI/FDII	(174.3)		2.9		—
BEAT	—		(7.0)		—
2017 Tax Act (transition tax and re-measurement of deferreds)	—		0.4		454.1
Foreign withholding	220.6		(3.1)		(21.0)
Provision to return	(152.8)		(1.0)		0.8
Other permanent differences	26.9		(0.1)		(2.6)
	243.1	%	21.1	%	527.7	%

The components of net deferred tax assets and liabilities are as follows (in thousands):


	Year Ended March 31,
	2020		2019
Deferred tax assets:
Accrued expenses	$	5,060	$	4,359

Deferred revenue	14,420		11,278
Reserves	3,216		5,463
Pension and other retiree benefits	5,078		5,960
Net operating loss carryforwards	12,443		14,992
Tax credit carryforwards	14,138		9,043
Share-based compensation	4,534		5,505
Operating lease liability	18,213		—
Other	20		166
Total gross deferred tax assets	77,122		56,766
Valuation allowance	(5,641)		(835)
Net deferred tax assets	71,481		55,931
Deferred tax liabilities:
Intangible assets	(146,950)		(164,199)
Other deferred liabilities	(8,061)		(1,609)
Operating lease right-of-use asset	(15,152)		—
Depreciation	(9,492)		(7,134)
Total deferred tax liability	$	(108,174)	$	(117,011)

Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. The Company weighs objective and verifiable evidence more heavily in this analysis. In situations where the Company concludes that it does not have sufficient objective and verifiable evidence to support the realizability of the asset it creates a valuation allowance against it. As a result, the Company established a valuation allowance of $0.8 million as of March 31, 2019 and $5.6 million as of March 31, 2020, representing an increase of $4.8 million. The increase in the valuation allowance as of March 31, 2020, as compared to March 31, 2019, is primarily related to deferred tax assets related to foreign tax credits that the Company believes are not more likely than not to be realized. If it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets through a tax benefit recorded in the period such determination is made.

At March 31, 2020, the Company had U.S. federal net operating loss carry forwards of approximately $19 million, state net operating loss carryforwards of approximately $34 million and tax credit carryforwards of approximately $12 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2021. The Company also had foreign net operating loss carryforwards of approximately $45 million at March 31, 2020 and tax credit carryforwards of approximately $4 million. The majority of foreign net operating losses have no expiration dates. Utilization of the U.S. net operating losses and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state tax provisions.

The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2015, although carryforward attributes that were generated prior to 2015 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of the tax return previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended March 31, 2020, 2019 and 2018 is as follows (in thousands):


	Year Ended March 31,
	2020		2019		2018
Balance at April 1,	$	1,314	$	2,215	$	2,926
Additions based on tax positions related to the current year	49		28		126
Release of tax positions of prior years	(212)		(194)		(481)

Decrease relating to settlements with taxing authorities	—		(735)		(356)
Balance at March 31,	$	1,151	$	1,314	$	2,215

The Company is unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would affect the effective tax rate if recognized.

The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision.

During fiscal year 2019, we completed our analysis and recording of all the tax effects related to the Tax Cuts and Jobs Act (TCJA), as required under SAB 118, and recorded a benefit of $87.0 million due to the re-measurement of our deferred taxes and a $2.0 million one-time transition tax.

The Company is subject to a territorial tax system under the TCJA, in which we are required to provide for tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The Company has established an accounting policy to provide for tax expense related to GILTI in the year the tax is incurred as a period expense.