14. INCOME TAXES

We account for our tax positions in accordance with Codification Topic 740. Under the guidance, we evaluate uncertain tax positions based on the two-step approach. The first step is to evaluate each uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained in an audit, including resolution of related appeals or litigation processes, if any. For tax positions that are not likely of being sustained upon audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As of March 31, 2025, and 2024, we do not have any unrecognized tax benefits for uncertain tax positions. We recognize accrued interest and penalties related to unrecognized tax benefits as part of income tax expense.

We file income tax returns, including returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. The tax years ended March 31, 2024, March 31, 2023, and March 31, 2022, are subject to examination by federal and state taxing authorities.

A reconciliation of income taxes computed at the statutory federal income tax rate of 21.0% to the provision for income taxes included in the consolidated statements of operations is as follows (in thousands, except percentages):


	Year Ended March 31,
	2025			2024			2023
Income tax expense computed at the US statutory federal rate	$	31,256		$	33,830		$	34,224
State income tax expense—net of federal benefit		7,722			9,624			8,754
Non-deductible executive compensation		2,020			1,718			1,708
Other		(137	)		145			(1,068	)
Provision for income taxes	$	40,861		$	45,317		$	43,618
Effective income tax rate		27.5	%		28.1	%		26.8	%

The components of the provision for income taxes are as follows (in thousands):


	Year Ended March 31,
	2025		2024			2023
Current:
Federal	$	26,708	$	34,232		$	30,928
State		9,648		12,371			10,110
Foreign		1,092		1,370			499
Total current expense		37,448		47,973			41,537

Deferred:
Federal		3,141		(2,419	)		1,301
State		127		(188	)		970
Foreign		145		(49	)		(190	)
Total deferred expense (benefit)		3,413		(2,656	)		2,081

Provision for income taxes	$	40,861	$	45,317		$	43,618

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows (in thousands):

	March 31,
	2025			2024
Deferred tax assets:
Accrued vacation	$	2,744		$	2,666
Deferred revenue		7,108			6,934
Allowance for credit losses		1,745			1,278
Restricted stock		301			738
Other deferred tax assets		841			689
Inventory reserve		1,313			546
Capitalized research expenditures		1,666			502
Accrued bonus		2,708			2,641
Lease liabilities		5,067			4,503
Other credits and carryforwards		101			251
Gross deferred tax assets		23,594			20,748
Less: valuation allowance		(63	)		(70	)
Net deferred tax assets		23,531			20,678

Deferred tax liabilities:
Property and equipment		(2,516	)		(2,724	)
Operating leases		(7,804	)		(3,889	)
Prepaid expenses		(4,095	)		(1,807	)
Right-of-use assets		(4,714	)		(4,113	)
Tax deductible goodwill		(2,198	)		(2,525	)
Total deferred tax liabilities		(21,327	)		(15,058	)

Net deferred tax asset	$	2,204		$	5,620

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. Based on this evaluation as of March 31, 2025, we are recognizing a valuation allowance to offset gross deferred tax assets primarily attributable to net operating losses at certain of the foreign subsidiaries and foreign tax credit carry forwards. We believe that it is more likely than not that we will realize the remaining gross deferred tax assets through generating taxable income or the reversal of existing temporary differences attributable to the gross deferred tax liabilities.

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

EPLUS INC Income Taxes Disclosure

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