Deduction in FDII

[Table of Contents](#i988317c7021a4a8fa66f2208a2958f7e_10)The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | July 31, |
| (In thousands) |  | 2022 |  | 2021 |
| Deferred tax assets: |  |   |  |   |
| Allowance for credit loss |  | $ | 1,210  |  |  | $ | 942  |  |
| Accrued compensation and benefits |  | 16,965  |  |  | 15,541  |  |
| State taxes |  | —  |  |  | —  |  |
| Operating lease liabilities |  | 24,379  |  |  | 25,176  |  |
| Accrued other |  | 5,053  |  |  | 4,551  |  |
| Deferred revenue |  | 4,560  |  |  | 4,239  |  |
|  |  |  |  |  |
| Losses carried forward |  | 29,936  |  |  | 24,384  |  |
| Federal tax benefit |  | 14,542  |  |  | 12,242  |  |
| Total gross deferred tax assets |  | 96,645  |  |  | 87,075  |  |
| Less: Valuation allowance |  | (29,171) |  |  | (24,987) |  |
| Net deferred tax assets |  | 67,474  |  |  | 62,088  |  |
| Deferred tax liabilities: |  |   |  |   |
| Vehicle pooling costs |  | (23,655) |  |  | (20,241) |  |
| Property and equipment |  | (72,975) |  |  | (55,047) |  |
| Operating lease right-of-use assets |  | (24,369) |  |  | (25,253) |  |
| Other prepaids |  | (728) |  |  | (461) |  |
| Intangibles and goodwill |  | (25,431) |  |  | (24,602) |  |
|  |  |  |  |  |
| Total gross deferred tax liabilities |  | (147,158) |  |  | (125,604) |  |
| Net deferred tax liabilities |  | $ | (79,684) |  |  | $ | (63,516) |  |

  
On December 22, 2017 legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), was enacted. The Act contains Global Intangible Low-Taxed Income (“GILTI”) provisions, which first impacted the Company in fiscal year 2019. The GILTI provisions effectively subject income earned by the Company's foreign subsidiaries to current U.S. tax at a rate of 10.5%, less foreign tax credits. Under U.S. GAAP, the Company can make an accounting policy election to either recognize deferred taxes for temporary differences expected to impact GILTI in future years or provide for tax expense related to GILTI in the year the tax is incurred as a period expense. The Company has elected to treat tax generated by GILTI provisions as a period expense. The Company has no GILTI inclusion for the fiscal year ended July 31, 2022.  
The Act also includes a favorable tax treatment for certain Foreign Derived Intangible Income (“FDII”), effective for the Company starting August 1, 2018. The Company’s estimate for FDII had a material impact to the effective income tax rate and income tax expense for the fiscal year ended July 31, 2022.  
The Company’s effective income tax rates were 18.7%, 16.5%, and 12.6% for fiscal 2022, 2021 and 2020, respectively. The Company’s U.S. federal statutory tax rate for fiscal years 2022, 2021 and 2020 was 21.0%. The effective tax rate for the fiscal year ending July 31, 2022 was unfavorably impacted by $8.2 million of discrete tax adjustments made in connection with finalizing the Company’s fiscal year 2021 tax return, favorably impacted by $17.0 million of discrete tax items related to amending previously filed income tax returns, and favorably impacted by a $37.2 million FDII deduction in the current year. The effective tax rate for the fiscal year ending July 31, 2021 was favorably impacted by $19.8 million of discrete tax adjustments made in connection with finalizing the Company’s fiscal year 2020 tax return. The effective tax rate for the fiscal year ending July 31, 2020 was negatively impacted by $1.7 million of discrete tax items related to amending previously filed income tax returns.  
The effective tax rates were also impacted by the recognition of excess tax benefits from the exercise of employee stock-based compensation of $14.4 million, $29.8 million, and $92.5 million, for fiscal years ended July 31, 2022, 2021 and 2020, respectively.   
The Company invested in renewable energy which is expected to generate investment tax credits of approximately $10 million the Company can utilize to reduce its tax liability on its fiscal year 2022 tax return.   
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