Netskope Inc Income Taxes Disclosure

Note 11 - Income Taxes

The Company elected to adopt the guidance in ASC 2023-09, Income Taxes - Improvements to Income Tax Disclosure, on a prospective basis beginning with the fiscal year ended January 31, 2026. The following table presents required disclosure pursuant to ASU 2023-09 and provides a reconciliation between income taxes computed at the federal statutory rate and the provision for income taxes for the fiscal year ended January 31, 2026 (in thousands, except percentages)

Deferred income taxes reflect the net tax effects of temporary difference between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax assets and liabilities as of January 31, 2026 and 2025, were as follows (in thousands):

The Company regularly assesses the need for a valuation allowance against its deferred tax assets by considering both positive and negative evidence related to whether it is more likely than not that the deferred tax assets will be realized. In evaluating the need for a valuation allowance, the Company considers the cumulative losses in recent years as a significant piece of negative evidence that is generally difficult to overcome. As of January 31, 2026 and 2025, the Company continues to maintain a full valuation allowance against its U.S. federal and state deferred tax assets.

As of January 31, 2026 and 2025, the Company recorded a valuation allowance of $571.6 million and $422.6 million, respectively, on its deferred tax assets that the Company does not expect to be realized. The change in the valuation allowance was an increase of $148.9 million for the fiscal year ended January 31, 2026. The increase in the valuation allowance during the fiscal year ended January 31, 2026 was mainly due to an increase in deferred tax assets for its net operating loss carryforward, deferred revenue, and stock-based compensation. The valuation allowance on the deferred tax assets increased by $66.7 million during the fiscal year ended January 31, 2025. The increase in the valuation allowance during the fiscal year ended January 31, 2025 was mainly due to an increase in net operating loss carryforwards and Section 174 capitalized costs.

As of January 31, 2026, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1.5 billion, of which $1.3 billion can be carried forward indefinitely but can only be used to offset 80% of taxable income. The remaining federal net operating loss carryforwards begin to expire in 2032. As of January 31, 2026, the Company had net operating loss carry-forwards for state income tax purposes of $695.9 million. The $603.6 million of state net operating loss carry-forwards begin expiring in 2026. The remaining $92.3 million of state net operating loss carry-forwards do not expire.

As of January 31, 2026, the Company had approximately $53.6 million of federal and $36.1 million of state research and development (R&D) credit carryforwards. The federal R&D tax credits expire in varying amounts between fiscal year 2032 and fiscal year 2045. The state R&D tax credits do not expire and may be carried forward indefinitely.

The Company's ability to utilize the net operating loss and tax credit carryforwards in the future may be subject to substantial restrictions in the event of future ownership changes as defined in Section 382 of Internal Revenue Code of 1986, as amended, and similar state tax law. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting a potential reduction in the gross deferred tax assets before considering the valuation allowance. The Company has conducted Section 382 studies and no past ownership changes would impact its ability to use these net operating losses.

The Company indefinitely reinvests earnings from its foreign subsidiaries and therefore no deferred tax liability has been recognized on the basis difference created by such earnings. The Company has not provided foreign withholding taxes for any undistributed earnings of the foreign subsidiaries.

As of January 31, 2026, the Company had $39.9 million of unrecognized tax benefits. If the $39.9 million is recognized, $5.9 million would impact the effective tax rate. The remaining amount would be offset by the reversal of related deferral tax assets which are subject to a full valuation allowance. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of interest and penalties was $0.7 million as of January 31, 2026.

The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to the Company's net operating loss carryforwards, the income tax returns generally remain subject to examination by federal and most state and foreign tax authorities.

The One Big Beautiful Bill Act (“OBBBA”), passed in July 2025 allows an immediate deduction for domestic research and experimental expenditures paid or incurred by the taxpayer during the taxable years beginning after December 31,2024. The Company is still required to capitalize and amortize foreign R&D expenses over 15 years.