Income Taxes

12 Months Ended

Jul. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

11. Income Taxes

The provision for income taxes consisted of the following for the periods indicated:

	Twelve Months Ended July 31,
(In millions)	2023		2022		2021
Current:
Federal	$	970	$	253	$	399
State	208		93		121
Foreign	86		31		17
Total current	1,264		377		537
Deferred:
Federal	(559)		85		(33)
State	(99)		18		(11)
Foreign	(1)		(4)		1
Total deferred	(659)		99		(43)
Total provision for income taxes	$	605	$	476	$	494

We recognized excess tax benefits on share-based compensation of $32 million, $134 million, and $126 million in the provision for income taxes for the twelve months ended July 31, 2023, 2022, and 2021, respectively.

The sources of income before the provision for income taxes consisted of the following for the periods indicated:

	Twelve Months Ended July 31,
(In millions)	2023		2022		2021
United States	$	2,798	$	2,433	$	2,497
Foreign	191		109		59
Total	$	2,989	$	2,542	$	2,556

Differences between income taxes calculated using the federal statutory income tax rate and the provision for income taxes were as follows for the periods indicated:

	Twelve Months Ended July 31,
(In millions)	2023		2022		2021
Income before income taxes	$	2,989	$	2,542	$	2,556
Statutory federal income tax	$	628	$	534	$	537
State income tax, net of federal benefit	86		87		87
Federal research and experimentation credits	(106)		(94)		(70)
Share-based compensation	58		45		32
Excess tax benefits related to share-based compensation	(26)		(112)		(105)
Effects of non-U.S. operations	(28)		4		4
Other, net	(7)		12		9
Total provision for income taxes	$	605	$	476	$	494

The state income tax line in the table above includes excess tax benefits related to share-based compensation of $6 million, $22 million and $21 million for the twelve months ended July 31, 2023, 2022, and 2021, respectively.

During the twelve months ended July 31, 2023, a transfer of certain intangible assets from our United Kingdom subsidiary to the United States resulted in the utilization of deferred tax assets previously subject to a full valuation allowance. The net tax benefit realized on the transfer was approximately $32 million, which is included in the effects of non-U.S. operations and state income tax lines in the table above.

In the current global tax policy environment, the U.S. and other domestic and foreign governments continue to consider, and in some cases enact, changes in corporate tax laws. As changes occur, we account for finalized legislation in the period of enactment.

Material deferred tax assets and liabilities were as follows at the dates indicated:

	July 31,
(In millions)	2023		2022
Deferred tax assets:
Accruals and reserves not currently deductible	$	31	$	84
Capitalized research and development (1)	667		—
Operating lease liabilities	153		168
Accrued and deferred compensation	90		84
Loss and tax credit carryforwards	256		224
Intangible assets	—		25
Share-based compensation	94		97
Other, net	27		23
Total gross deferred tax assets	1,318		705
Valuation allowance	(235)		(244)
Total deferred tax assets	1,083		461
Deferred tax liabilities:
Operating lease right-of-use assets	128		149
Intangibles	840		868
Property and equipment	8		9
Other, net	47		43
Total deferred tax liabilities	1,023		1,069
Net deferred tax assets (liabilities)	$	60	$	(608)

(1) As required by the 2017 Tax Cuts & Jobs Act, our research and development costs are capitalized and amortized for U.S. tax purposes for the twelve months ended July 31, 2023. The mandatory capitalization requirement significantly increased our deferred tax assets at July 31, 2023.

The components of total net deferred tax assets (liabilities), net of valuation allowances, as shown on our consolidated balance sheets were as follows at the dates indicated:

	July 31,
(In millions)	2023		2022
Long-term deferred income tax assets	$	64	$	11
Long-term deferred income tax liabilities	(4)		(619)
Net deferred tax assets (liabilities)	$	60	$	(608)

We have provided a valuation allowance related to state research and experimentation tax credit carryforwards, foreign loss carryforwards and state operating loss carryforwards that we believe are unlikely to be realized. We have a valuation allowance of $235 million and $244 million for the twelve months ended July 31, 2023 and July 31, 2022. The valuation allowance on our net deferred taxes decreased by $9 million for the twelve months ended July 31, 2023. The change in the valuation allowance was primarily related to a decrease in the allowance for foreign intangible deferred tax assets and foreign net operating loss carryforwards, net of an increase in the allowance for state research and experimentation tax credit carryforwards. The valuation allowance on our net deferred taxes increased by $39 million for the twelve months ended July 31, 2022. The change in the valuation allowance was primarily related to state research and experimentation tax credit carryforwards.

At July 31, 2023, we had federal net operating loss carryforwards of approximately $52 million that will start to expire in fiscal 2032. Utilization of the net operating losses is subject to annual limitation. The annual limitation may result in the expiration of net operating losses before utilization.

At July 31, 2023, we had state net operating loss carryforwards of approximately $150 million for which we have recorded a deferred tax asset of $10 million and a valuation allowance of $5 million. The state net operating loss carryforwards will start to expire in fiscal 2028. Utilization of the net operating losses is subject to annual limitation. The annual limitation may result in the expiration of net operating losses before utilization.

At July 31, 2023, we had foreign net operating loss carryforwards of approximately $96 million which carry forward indefinitely. We maintain a full valuation allowance with respect to the foreign net operating losses as there is not sufficient evidence of future sources of taxable income required to utilize such carryforwards.

At July 31, 2023, we had California research and experimentation credit carryforwards of approximately $343 million. The California research and experimentation credit will carry forward indefinitely.

Unrecognized Tax Benefits

The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the periods indicated:

	Twelve Months Ended July 31,
(In millions)	2023		2022		2021
Gross unrecognized tax benefits, beginning balance	$	216	$	190	$	101
Increases related to tax positions from prior fiscal years, including acquisitions	11		9		69
Decreases related to tax positions from prior fiscal years	(16)		(13)		—
Increases related to tax positions taken during current fiscal year	38		31		31
Settlements with tax authorities	(2)		—		—
Lapse of statute of limitations	(1)		(1)		(11)
Gross unrecognized tax benefits, ending balance	$	246	$	216	$	190

The total amount of our unrecognized tax benefits at July 31, 2023 was $246 million. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $152 million. We do not believe that it is reasonably possible that there will be a material increase or decrease in unrecognized tax benefits over the next 12 months.

We file U.S. federal, U.S. state, and foreign tax returns. Our major tax jurisdiction is the U.S. federal jurisdiction. For U.S. federal tax returns, we are no longer subject to tax examinations for fiscal 2017 and for years prior to fiscal 2016.

We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes. Amounts accrued at July 31, 2023 and July 31, 2022 for the payment of interest and penalties were not material. The amounts of interest and penalties that we recognized during the twelve months ended July 31, 2023, 2022, and 2021, were also not material.

We offset an $85 million and $89 million long-term liability for uncertain tax positions against our long-term income tax receivable at July 31, 2023 and July 31, 2022, respectively. The long-term income tax receivable at July 31, 2023 and July 31, 2022 was primarily related to the government’s approval of a method of accounting change request for fiscal 2018 and a refund claim related to Credit Karma’s alternative minimum tax credit that was recorded as part of the acquisition.