Income and other Taxes

The Company's (loss) income before income taxes consisted of the following:



(Loss) income before income taxes	For the Fiscal Years Ended September 30,
(in thousands)	2014			2013			2012
Domestic	$	(19,478	)	$	7,137		$	(38,613	)
Foreign	250			(2,029		)	1,086
(Loss) income before income taxes	$	(19,228	)	$	5,108		$	(37,527	)

The Company's income tax (benefit) expense consisted of the following:



Income tax (benefit) expense	For the Fiscal Years Ended September 30,
(in thousands)	2014			2013		2012
Federal:
Current	$	—		$	120	$	—
Deferred	(21,590		)	—		—
	(21,590		)	120		—
State:
Current	—			—		—
Deferred	(2,490		)	—		—
	(2,490		)	—		—
Foreign
Current	—			—		1,644
Deferred	—			—		—
	—			—		1,644
Total income tax (benefit) expense	$	(24,080	)	$	120	$	1,644

The deferred tax benefit of $24.1 million relates primarily to the recognition of deferred tax assets which will used in fiscal year 2015 when income tax expense is recorded as a result of the sale of the Photovoltaics Business.

EMCORE Corporation is incorporated in the state of New Jersey. A reconciliation of the provision for income taxes, with the amount computed by applying the statutory U.S. federal and state income tax rates to income before provision for income taxes is as follows:



Provision for Income Taxes	For the Fiscal Years Ended September 30,
(in thousands)	2014			2013			2012
Income tax (benefit) expense computed at U.S. federal statutory rate	$	(6,537	)	$	1,700		$	(12,800	)
State tax expense (benefit), net of U.S. federal effect	2,989			400			(1,400		)
Foreign	—			—			1,600
NOL adjustments	24,515			—			—
Capital losses	(5,217		)	—			—
Other	(1,033		)	1,320			744
Change in valuation allowance	(38,797		)	(3,300		)	13,500
Income tax (benefit) expense	$	(24,080	)	$	120		$	1,644
Effective tax rate	125		%	2		%	4		%

Significant components of our deferred tax assets are as follows:



Deferred Tax Assets	As of September 30, 2014			As of September 30, 2013
(in thousands)	As of September 30, 2014			As of September 30, 2013
Deferred tax assets:
Federal net operating loss carryforwards	$	155,741		$	166,834
Foreign net operating loss carryforwards	646			4,052
Income tax credit carryforwards	2,641			2,641
Inventory reserves	4,439			3,743
Accounts receivable reserves	51			1,275
Accrued warranty reserve	1,171			799
State net operating loss carryforwards	10,454			14,289
Investment write-down	—			5,315
Stock compensation	3,300			3,325
Deferred compensation	1,647			1,466
Fixed assets and intangibles	10,501			12,681
Capital loss carryover	10,565			—
Other	1,868			1,320
Total deferred tax assets	203,024			217,740
Valuation allowance	(178,944		)	(217,740		)
Net deferred tax assets	$	24,080		$	—

During the fiscal year ended September 30, 2014 there was a significant decrease in the valuation allowance primarily from domestic and foreign restructurings resulting in the elimination of unutilized net operating loss carryforwards and the release of a portion of the valuation allowance as a result of the sale of the Photovoltaics business in fiscal year 2015.

With regards to foreign restructurings during the fiscal year ended September 30, 2014, the Spain subsidiary was liquidated as of September 30, 2014 and the Netherlands subsidiary began liquidation during the fiscal year. These subsidiaries had a remaining net operating loss carryforward of approximately $9.0 million which has been eliminated from the deferred tax balances as of September 30, 2014. In addition, during the fiscal year ended September 30, 2014, approximately $4.1 million of China net operating loss carryforwards have expired.

During the quarter ended September 30, 2014, the Company determined that it was more likely than not that certain deferred tax assets would be realized upon the closing of the sale of the Photovoltaics Business. Prior to the quarter ended September 30, 2014, because of significant negative evidence including the Company’s lack of historical profitability and expected losses in future years, the Company determined that it was more likely than not that the deferred tax assets would not be realized. However, with the December 10, 2014 closing of the sale of the Photovoltaics Business, the Company will realize a gain on the sale that will result in the realization of a portion of our deferred tax assets. Upon considering the relative impact of all evidence, both negative and positive, and the weight accorded to each, the Company concluded that it was more likely than not that certain deferred tax assets would be realized and that the applicable valuation allowance should be released as of September 30, 2014.

Accordingly, a net deferred tax valuation allowance release of $24.1 million was recorded as an income tax benefit during fiscal year 2014. We expect that substantially all of the $24.1 million in deferred tax assets will be used in fiscal year 2015 when income tax expense is recorded as a result of closing the sale of the Photovoltaics Business on December 10, 2014, thus resulting in no cash received for the deferred tax assets. The Company believes its forecast of future taxable income is reasonable; however, it is inherently uncertain. The deferred tax valuation allowance is based primarily on estimates related to the taxable gains and losses on the sales of the Photovoltaics Business and Digital Products Business as well as estimates related to future taxable income. To the extent these estimates may change, it could have a significant effect on future income tax benefit or expense.

For the fiscal years ended September 30, 2014, 2013 and 2012, the Company recorded income tax (benefit) expense of approximately $(24.1) million, $0.1 million and $1.6 million, respectively. As of September 30, 2014 and 2013, we had approximately $0.4 million of interest and penalties accrued as tax liabilities on our balance sheet.

During the three months ended December 31, 2011, as part of an equity recapitalization at our former Suncore joint venture we received a deemed capital distribution of $14.8 million. The deemed capital distribution was subject to a 10% foreign withholding tax. As a result, we were subject to a $1.6 million foreign tax expense and Suncore made a cash dividend for an equal amount. The foreign tax expense was treated as a tax credit for U.S. tax purposes. See Note 17 - Suncore Joint Venture for additional disclosures related to this foreign income tax expense.

The Company prepared an Internal Revenue Code 382 analysis to determine the annual limitations on the Company's consolidated net operating loss carryforwards. The result was it was determined that the net operating loss carryforwards of two domestic subsidiaries had no value. This conclusion was based upon the Internal Revenue Code 382 annual limitation determined when the subsidiaries were acquired coupled with their inactive status. As a result, the Company commenced the process of dissolving these entities as of September 30, 2014. Accordingly, approximately $57.4 million of federal net operating loss carryforwards related to these dissolved subsidiaries have been eliminated from the deferred tax balances at September 30, 2014.

As of September 30, 2014, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $458.1 million which begin to expire in 2021. As of September 30, 2014, the Company had foreign net operating loss carryforwards of $5.0 million which began to expire in 2014, as well as, state net operating loss carryforwards of approximately $266.0 million which began to expire in 2014. As of September 30, 2014, the Company also had tax credits (primarily foreign income and U.S. research and development tax credits) of approximately $2.6 million. The research credits will begin to expire in 2018. Utilization of net operating loss and tax credit carryforwards are subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. As a result, of the $458.1 million of U.S. net operating loss carryforwards, approximately $247.3 million is subject to an annual limitation and $210.8 million of the net operating losses are not subject to an annual limitation. Such annual limitations could result in the expiration of the net operating loss and tax credit carryforwards before utilization. At this time, the Company has not determined the full extent of the ownership change limitations upon the state operating loss carryforwards.

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



Unrecognized Gross Tax Benefit (in thousands)
Balance as of September 30, 2012	$	620
Adjustments based on tax positions related to the current year	—
Adjustments based on tax positions of prior years	—
Balance as of September 30, 2013	$	620
Adjustments based on tax positions related to the current year	—
Adjustments based on tax positions of prior years	—
Balance as of September 30, 2014	$	620

We file income tax returns in the U.S. federal, state, and local jurisdictions. Currently, the Company's September 30, 2012, federal return is under examination. The examination is currently in progress and the Company has not been notified of any significant issues. There are no state income tax returns under examination. The following tax years remain open to assessment for each of the more significant jurisdictions where we are subject to income taxes: after fiscal year 2010 for U.S. federal, after fiscal year 2009 for the state of California, and after fiscal year 2010 for the state of New Mexico.

Included in our operating income for the fiscal years ended September 30, 2014 and 2013 were $0.8 million and $1.8 million, respectively, of New Mexico incentive tax credits received. The amount received was allocated to cost of goods sold, selling, general and administrative and research and development expense primarily based on the number of employees allocated to the related departments. These credits will result in cash refunds and reduction of future payroll and compensation taxes. There were no significant incentive tax credits received during the fiscal years ended September 30, 2012.