14.INCOME TAXES

Our benefit (provision) for income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2018		2017		2016
Current:
Federal	$	29	$	69	$	(380)
State		210		(71)		(197)
Foreign		(2,947)		(2,320)		(2,553)
		(2,708)		(2,322)		(3,130)

Deferred:
Federal		1,426		(1,227)		(1,584)
State		(314)		(17)		70
Foreign		(281)		468		50
Operating loss carryforward		2,636		6,964		-
Adjustment for changes in U.S.
income tax rates		1,654		-		-
Valuation allowance		(2,780)		(129)		(301)
		2,341		6,059		(1,765)
	$	(367)	$	3,737	$	(4,895)

The allocation of our total income tax benefit (provision) is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2018		2017		2016
Net income (loss)	$	(367)	$	3,737	$	(4,895)
Other comprehensive income		(75)		37		115
	$	(442)	$	3,774	$	(4,780)

Income (loss) before income taxes consisted of the following (in thousands):



YEAR ENDED
AUGUST 31,		2018		2017		2016
United States	$	(8,960)	$	(10,126)	$	9,328
Foreign		3,440		(783)		2,583
	$	(5,520)	$	(10,909)	$	11,911

The differences between income taxes at the statutory federal income tax rate and the consolidated income tax rate reported in our consolidated statements of operations were as follows:


YEAR ENDED AUGUST 31,	2018	2017	2016
Federal statutory income tax rate	25.7%	35.0%	(35.0)%
State income taxes, net of federal effect	2.6	2.3	(1.9)
Effect of change in U.S. federal tax rate	30.0	-	-
Valuation allowance	(50.4)	(1.2)	(2.5)
Foreign jurisdictions tax differential	(6.8)	(1.9)	0.6
Tax differential on income subject to both U.S. and foreign taxes	2.3	0.4	(1.9)
Uncertain tax positions	(5.1)	4.4	0.4
Non-deductible executive compensation	(2.7)	(1.6)	-
Non-deductible meals and entertainment	(8.9)	(2.2)	(1.6)
Payout of deferred compensation (NQDC)	4.4	-	-
Other	2.2	(0.9)	0.8
	(6.7)%	34.3%	(41.1)%

The Tax Cut and Jobs Act (the 2017 Tax Act) was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax code by, among other things, lowering the statutory corporate tax rate from 35 percent to 21 percent; eliminating certain deductions; imposing a mandatory one-time transition tax, or deemed repatriation tax, on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred; introducing new tax regimes; and changing how foreign earnings are subject to U.S. tax.

Since we have an August 31 fiscal year end, the lower corporate income tax rate is phased in, resulting in a U.S. statutory federal rate of 25.7 percent for fiscal 2018 and 21 percent rate for subsequent fiscal years. Other provisions of the 2017 Tax Act will not be effective for us until fiscal 2019, including limitations on the deductibility of interest and executive compensation as well as anti-deferral provisions on Global Intangible Low-Taxed Income.

We have completed our accounting for the effects of the 2017 Tax Act and recorded income tax benefits totaling $1.7 million during fiscal 2018, including a one-time income tax benefit of $0.9 million as of the date of enactment. We recognized $0.8 million of the one-time benefit from re-measuring our net deferred tax liabilities at the reduced U.S. federal tax rate and $0.2 million of the benefit from other changes enacted by the 2017 Tax Act. These benefits were partially offset by $0.1 million of expense from the deemed repatriation of accumulated earnings from our foreign subsidiaries.

On September 1, 2017, we adopted the provisions of ASU 2016-09, which requires that the benefits of deductions resulting from stock-based compensation in excess of the corresponding book expense be recorded as a component of our income tax provision or benefit for the period, instead of being recorded to additional paid-in capital. We recorded an immaterial amount of income tax expense in fiscal 2018 for stock-based compensation deductions that were less than the corresponding book expense. We recorded $0.2 million to paid-in capital in fiscal 2017 for excess tax deductions and an insignificant deduction against paid-in capital during fiscal 2016 for the shortfall in tax deductions related to stock-based compensation.

The significant components of our deferred tax assets and liabilities were comprised of the following (in thousands):



AUGUST 31,		2018		2017
Deferred income tax assets:
Net operating loss carryforward	$	9,039	$	10,310
Sale and financing of corporate
headquarters		4,919		8,420
Foreign income tax credit
carryforward		6,562		4,382
Stock-based compensation		1,174		2,954
Inventory and bad debt reserves		1,046		1,643
Bonus and other accruals		1,511		1,574
Deferred revenue		236		510
Other		323		337
Total deferred income tax assets		24,810		30,130
Less: valuation allowance		(3,397)		(612)
Net deferred income tax assets		21,413		29,518

Deferred income tax liabilities:
Intangibles step-ups – indefinite lived		(5,427)		(8,539)
Intangibles step-ups – finite lived		(4,103)		(7,607)
Intangible asset impairment and
amortization		(3,023)		(4,875)
Property and equipment depreciation		(3,518)		(4,960)
Deferred commissions		(1,596)		(2,195)
Unremitted earnings of foreign
subsidiaries		(380)		(492)
Other		(354)		(236)
Total deferred income tax liabilities		(18,401)		(28,904)
Net deferred income taxes	$	3,012	$	614

Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):



AUGUST 31,		2018		2017
Long-term assets	$	3,222	$	1,647
Long-term liabilities		(210)		(1,033)
Net deferred income tax asset	$	3,012	$	614

As of August 31, 2016, we had utilized all of our U.S. federal net operating loss carryforwards. However, we incurred a federal net operating loss of $16.4 million in fiscal 2017 and acquired a federal net operating loss carryforward of $7.7 million in connection with the purchase of the stock of Jhana Education (Note 2) in fiscal 2017. During fiscal 2018, we incurred a federal net operating loss of $9.7 million. Our U.S. federal net operating loss carryforwards were comprised of the following at August 31, 2018 (in thousands):



	Loss Carryforward				Loss		Loss		Operating
Loss Carryforward	Expires				Deductions		Deductions		Loss Carried
for Year Ended	August 31,		Amount		in Prior Years		in Current Year		Forward
December 31, 2012	2031	$	243	$	-	$	-	$	243
December 31, 2013	2032		553		-		-		553
December 31, 2014	2033		1,285		-		-		1,285
December 31, 2015	2034		1,491		-		-		1,491
December 31, 2016	2035		3,052		-		-		3,052
July 15, 2017 Acquired NOL	2036		1,117		-		-		1,117
			7,741		-		-		7,741
August 31, 2017	2037		16,381		-		-		16,381
August 31, 2018	No expiration		9,677		-		-		9,677
		$	33,799	$	-	$	-	$	33,799

We have U.S. state net operating loss carryforwards generated in fiscal 2009 and before in various jurisdictions that expire primarily between September 1, 2018 and August 31, 2029. The U.S. state net operating loss carryforwards generated in fiscal 2017 and fiscal 2018 primarily expire on August 31, 2037 and 2038, respectively. The state net operating loss carryforwards acquired through the purchase of Jhana Education stock expire between August 31, 2031 and August 31, 2036.

Our U.S. foreign income tax credit carryforwards were comprised of the following at August 31, 2018 (in thousands):



Credit Generated in					Credits Used		Credits Used		Credits
Fiscal Year Ended	Credit Expires		Credits		in Prior		in Fiscal		Carried
August 31,	August 31,		Generated		Years		2018		Forward
2011	2021	$	3,445	$	(414)	$	-	$	3,031
2012	2022		2,563		(2,563)		-		-
2013	2023		2,815		(2,815)		-		-
2014	2024		1,378		(1,378)		-		-
2015	2025		1,422		(1,422)		-		-
2016	2026		1,569		(1,569)		-		-
2017	2027		1,804		-		-		1,804
2018	2028		1,727		-		-		1,727
		$	16,723	$	(10,161)	$	-	$	6,562

In fiscal 2018, we established a valuation allowance of $3.0 million against our foreign tax credit carryforward from fiscal 2011, after concluding it is more likely than not that the carryforward will expire unused at the end of fiscal 2021. Our emphasis of the All Access Pass has generated, and will likely continue to generate, substantial amounts of deferred revenue for both book and tax purposes. This situation has produced taxable losses for the past two fiscal years and a more-likely-than-not presumption that insufficient taxable income will be available to realize the fiscal 2011 foreign tax carryforward, which expires at the end of fiscal 2021.

During the year ended August 31, 2016, we determined it was more likely than not that deferred tax assets of a foreign subsidiary would not be realized. Accordingly, we recorded a $0.3 million valuation allowance against these deferred tax assets in fiscal 2016. During fiscal 2017, we increased this valuation allowance by $0.1 million to $0.4 million, which reduced our income tax benefit for the year by $0.1 million. During fiscal 2018, we reduced this valuation allowance by $0.2 million, which increased our income tax benefit for the year by $0.2 million.

We acquired federal and state net operating loss carryforwards in connection with the purchase of Jhana Education stock during fiscal 2017. Section 382 of the Internal Revenue Code limits our ability to use these acquired losses. Accordingly, we recorded valuation allowances in the amount of $0.2 million against the related deferred tax assets. Our income tax benefit for fiscal 2017 was unaffected by this valuation allowance. The reduction of the federal income tax rate under the 2017 Tax Act reduced this valuation allowance by $0.1 million and resulted in a corresponding increase to our income tax benefit during fiscal 2018.

We have determined that projected future taxable income is adequate to allow for realization of all deferred tax assets, except for the assets subject to valuation allowances. We considered sources of taxable income, including reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. Based on the factors described above, we concluded that realization of our deferred tax assets, except those subject to the valuation allowances described above, is more likely than not at August 31, 2018.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):



YEAR ENDED
AUGUST 31,		2018		2017		2016
Beginning balance	$	2,359	$	3,024	$	3,115
Additions based on tax positions
related to the current year		27		10		199
Additions for tax positions in
prior years		367		85		3
Reductions for tax positions of prior
years resulting from the lapse of
applicable statute of limitations		(253)		(634)		(212)
Other reductions for tax positions of
prior years		(389)		(126)		(81)
Ending balance	$	2,111	$	2,359	$	3,024

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.8 million at August 31, 2018, and $1.6 million at August 31, 2017. Included in the ending balance of gross unrecognized tax benefits at August 31, 2018 is $1.8 million related to individual states’ net operating loss carryforwards. Interest and penalties related to uncertain tax positions are recognized as components of income tax expense. The net accruals and reversals of interest and penalties increased or decreased our income tax expense by an insignificant amount in each of fiscal 2018, fiscal 2017 and fiscal 2016. The balance of interest and penalties included in other long-term liabilities on our consolidated balance sheets at August 31, 2018 and 2017 was $0.2 million and $0.3 million, respectively.

During the next 12 months, we expect a decrease in unrecognized tax benefits totaling $0.2 million relating to non-deductible expenses and state net operating loss deductions upon the lapse of the applicable statute of limitations.

We file United States federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The tax years that remain subject to examinations for our major tax jurisdictions are shown below.

2011-2018	Canada and Australia
2013-2018	Japan and the United Kingdom
2014-2018	United States – state and local income tax
2015-2018	United States – federal income tax
2016-2018	China
2017-2018	Singapore