Income Taxes

12 Months Ended

Jun. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The components of loss before provision for (benefit from) income taxes were as follows during the periods presented (in thousands):

	Year ended June 30,
	2023		2022		2021
Domestic	$	(199,452)	$	(304,508)	$	(139,337)
Foreign	(23,465)		(26,171)		—
Total	$	(222,917)	$	(330,679)	$	(139,337)

The components of provision for (benefit from) income taxes were as follows during the periods presented (in thousands):

	Year ended June 30,
	2023		2022		2021
Current:
Federal	$	572	$	(247)	$	—
State	1,583		—		—
Foreign	14		—		—
Total current	2,169		(247)		—
Deferred:
Federal	(995)		(1,115)		(27,529)
State	(366)		(2,956)		(13,088)
Foreign	—		—		—
Total deferred	(1,361)		(4,071)		(40,617)
Provision for (benefit from) income taxes	$	808	$	(4,318)	$	(40,617)

The items accounting for the difference between the income taxes computed at the federal statutory rate and the provision for (benefit from) income taxes consisted of the following during the periods presented (in thousands):

	Year ended June 30,
	2023		2022		2021
Expected benefit at U.S. federal statutory rate	$	(46,813)	$	(69,443)	$	(29,261)
State income taxes, net of federal benefit	8,087		13,509		(54)
Stock-based compensation (1)	4,253		(93,705)		(70,262)
Research and development tax credits	(19,974)		(22,061)		(8,846)
Change in valuation allowance related to acquisition (2)	(126)		(2,831)		(34,749)
Change in valuation allowance (3)	48,321		174,477		94,244
Unrecognized tax benefit	(390)		(10,975)		6,766
Acquisition-related costs	—		553		1,484
Foreign rate differential	4,942		5,496		—
Other	2,508		662		61
Provision for (benefit from) income taxes	$	808	$	(4,318)	$	(40,617)

(1) The rate impact during the year ended June 30, 2023 relates to the impact of non-deductible stock compensation and shortfalls related to tax deductions being smaller than the associated stock compensation expense. The rate impact during the years ended June 30, 2022 and 2021 pertains windfalls from tax deductions being larger than the associated stock compensation expense.

(2) The rate impact during the years ended June 30, 2022 and 2021 pertains to the income tax benefit recorded as a result of the acquisitions of Invoice2go and Divvy, respectively, which allowed the Company to release a portion of its valuation allowance due to the net deferred tax liabilities that were recorded as a result of such acquisitions.

(3) The rate impact during the year ended June 30, 2023, 2022 and 2021 pertains to (i) an increase in valuation allowance due to the increase in deferred tax assets associated with losses, capitalized R&D expense and tax credits generated during the year, (ii) a change in deferred tax liability related to the 2025 Notes, and (iii) a change in deferred tax liability related to the acquisitions of Invoice2go and Divvy.

The components of deferred tax assets and liabilities were as follows as of the dates presented (in thousands):

	June 30,
	2023		2022
Deferred tax assets:
Accruals and reserves	$	12,537	$	9,325
Capitalized research and development	75,694		—
Deferred revenue	1,084		1,794
Stock-based compensation	24,998		25,897
Net operating loss carryforwards	379,758		410,849
Research and development credits	62,299		46,013
Accrued rewards	1,855		2,867
Operating lease liabilities	21,616		24,203
Other	1,257		3,247
Total deferred tax assets before valuation allowance	581,098		524,195
Valuation allowance	(479,449)		(384,158)
Deferred tax assets	$	101,649	$	140,037
Deferred tax liabilities:
Deferred contract costs	$	(4,772)	$	(3,745)
Property and equipment	(13,078)		(19,316)
Intangible assets	(67,455)		(99,483)
Operating right of use assets	(17,155)		(19,490)
Total deferred tax liabilities	$	(102,460)	$	(142,034)
Net deferred tax liabilities	$	(811)	$	(1,997)

Accounting Standards Codification 740 requires that the tax benefit of net operating losses, temporary differences, and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Because of the Company’s recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance. The change in valuation allowance was approximately $95.3 million, $276.3 million, and $22.3 million during the years ended June 30, 2023, 2022, and 2021, respectively. The increase in the June 30, 2023 valuation allowance is primarily from the application of the Tax Cuts and Jobs Act of 2017 effective fiscal year 2023 and thereafter, that requires companies to capitalize and amortize research and development expenses rather than deduct the costs as incurred, offset by a reduction in a deferred tax liabilities. The net deferred tax liability is included as other long-term liabilities in the accompanying consolidated balance sheet.

The Tax Cuts and Job Act subjects a U.S. company to tax on its Global Intangible Low Tax Income (GILTI). Under GAAP, the Company can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into the measurement of deferred taxes. The Company elected the period expense method.

The Company does not currently operate under any tax holiday in any country in which it operates.

The Company does not have foreign earnings available to distribute. As such, there is no unrecorded deferred tax liability associated with an outside basis of foreign subsidiaries.

As of June 30, 2023, the Company had NOL carryforwards of $1.4 billion, $1.1 billion, and $83.4 million for federal, state, and foreign tax purposes, respectively, that are available to reduce future taxable income. If not utilized, the state NOL carryforwards will begin to expire in 2025. As of June 30, 2023, the federal and foreign NOL carryforwards do not expire and will carry forward indefinitely until utilized. As of June 30, 2023, the

Company also had research and development tax credit carryforwards of approximately $56.1 million and $35.6 million for federal and state tax purposes, respectively. If not utilized, the federal tax credits will expire at various dates beginning in 2039. The state tax credits do not expire and will carry forward indefinitely until utilized.

Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Code and other similar state provisions. The annual limitation may result in the expiration of NOLs and tax credits before utilization.

Below is the reconciliation of the unrecognized tax benefits related to federal and California research and development credits during the periods presented (in thousands):

			Year ended June 30,
	2023		2022		2021
Balance at the beginning of the year	$	16,724	$	22,185	$	5,787
Add:
Tax positions related to the current year	6,642		7,354		8,267
Increase from business combination	—		160		668
Tax positions related to the prior year	226		—		7,463
Less:
Tax positions related to the prior year	—		(12,761)		—
Statute of limitations lapse	(292)		(214)		—
Balance at the end of the year	$	23,300	$	16,724	$	22,185

The Company had unrecognized tax benefits of approximately $23.3 million and $16.7 million as of June 30, 2023 and 2022, respectively, all of which are offset by a full valuation allowance. If the unrecognized tax benefits as of June 30, 2023 is recognized, it will not have an impact to the effective tax rate due to the Company’s valuation allowance.

The amount of interest and penalties accrued as of each of June 30, 2023 and 2022 were not material.

The Company files income tax returns in the U.S. for U.S. federal, California, and various states and foreign jurisdictions. The Company’s U.S. federal, state, and foreign tax returns for all years remain subject to examination by taxing authorities as a result of unused tax attributes being carried forward. The Company records liabilities related to uncertain tax positions, which provide adequate reserves for income tax uncertainties in all open tax years. The Company’s management evaluates the realizability of the Company’s deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on the Company’s ability to generate sufficient future taxable income during the foreseeable future. The Company does not anticipate any material change on its unrecognized tax benefits over the next 12 months.

In December 2022, the Internal Revenue Service initiated an audit of Divvy's pre-acquisition tax year ending December 31, 2020, which was closed without adjustment on August 7, 2023.