Income and other Taxes

The Company's loss from continuing operations before income taxes consisted of the following:



(Loss) income from continuing operations before income taxes	For the Fiscal Years Ended September 30,
(in thousands)	2015			2014			2013
Domestic	$	(5,713	)	$	(19,792	)	$	(8,095	)
Foreign	1,250			(676		)	(852		)
Loss from continuing operations before income taxes	$	(4,463	)	$	(20,468	)	$	(8,947	)

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



Income tax benefit	For the Fiscal Years Ended September 30,
(in thousands)	2015			2014			2013
Federal:
Current	$	—		$	—		$	—
Deferred	(1,835		)	(21,285		)	(2,752		)
	(1,835		)	(21,285		)	(2,752		)
State:
Current	—			—			—
Deferred	(356		)	(2,454		)	(317		)
	(356		)	(2,454		)	(317		)
Foreign:
Current	—			—			—
Deferred	—			(811		)	(324		)
	—			(811		)	(324		)
Total income tax benefit	$	(2,191	)	$	(24,550	)	$	(3,393	)

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 continuing operations income before provision for income taxes is as follows:



Provision for Income Taxes	For the Fiscal Years Ended September 30,
(in thousands)	2015			2014			2013
Income tax benefit computed at U.S. federal statutory rate	$	(1,518	)	$	(6,959	)	$	(3,042	)
State tax expense benefit, net of U.S. federal effect	(356		)	(776		)	(317		)
Foreign tax rate differential	(269		)	1,041			(34		)
Release of valuation allowance-domestic	—			(17,856		)	—
Other	108			—			—
Change in valuation allowance	(156		)	—			—
Income tax benefit	$	(2,191	)	$	(24,550	)	$	(3,393	)
Effective tax rate	49.1		%	119.9		%	37.9		%

Significant components of our deferred tax assets are as follows:



Deferred Tax Assets	As of September 30, 2015			As of September 30, 2014
(in thousands)	As of September 30, 2015			As of September 30, 2014
Deferred tax assets:
Federal net operating loss carryforwards	$	147,704		$	155,741
Foreign net operating loss carryforwards	66			646
Income tax credit carryforwards	3,033			2,641
Inventory reserves	2,283			4,439
Accounts receivable reserves	149			51
Accrued warranty reserve	587			1,171
State net operating loss carryforwards	9,527			10,454
Stock compensation	2,837			3,300
Deferred compensation	1,080			1,647
Fixed assets and intangibles	1,646			10,501
Capital loss carryover	—			10,565
Other	1,388			1,868
Total deferred tax assets	170,300			203,024
Valuation allowance	(170,300		)	(178,944		)
Net deferred tax assets	$	—		$	24,080

At September 30, 2014, the Company determined that it was more likely than not that certain deferred tax assets would be realized upon the sale of the Photovoltaic Business in fiscal year 2015. As a result, a net deferred tax valuation allowance release of $24.6 million was recorded as an income tax benefit during fiscal year 2014. The sale of the Photovoltaic Business closed on December 10, 2014 and the Company realized a gain on the transaction.

During the fiscal year ended September 30, 2015, the Company utilized the $24.6 million of deferred tax assets. The Company paid alternative minimum taxes of $0.6 million during the fiscal year ended September 30, 2015 and the remaining income tax expense will be offset mainly through utilization of $24.1 million of capital loss and utilization of net operating loss carry forwards.

For the fiscal years ended September 30, 2015, 2014 and 2013, the Company recorded income tax benefit from continuing operations losses of approximately $2.2 million, $24.6 million and $3.4 million, respectively. For the fiscal years ended September 30, 2015, 2014 and 2013, the Company recorded income tax expense within discontinued operations of approximately $26.5 million, $0.5 million and $3.5 million, respectively. In the fiscal year ended September 30, 2015, the income tax expense within discontinued operations includes estimated alternative minimum tax and other adjustments prescribed by ASC 740.

For fiscal years ended September 30, 2015, 2014 and 2013, the effective tax rate on continuing operations was 49.1%, 119.9% and 37.9%, respectively. The lower tax rate for fiscal year 2015 was primarily due to permanent differences, state tax benefits, foreign tax rate differentials, and release of state taxes associated with uncertain tax positions. The higher tax rate for fiscal year 2014 was mainly attributable to the partial release of the valuation allowance. The Company uses estimates to forecast the results from continuing operations for the current fiscal year as well as permanent differences between book and tax accounting.

We have not provided for U.S. federal and state income taxes on non-U.S. subsidiaries undistributed earnings as of September 30, 2015 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries.

All remaining deferred tax assets will have a full valuation allowance at September 30, 2015. However, on a quarterly basis, the Company will evaluate the positive and negative evidence to assess whether the more likely than not criteria, mandated by ASC 740, has been satisfied in determining whether there will be further adjustments to the valuation allowance.

During the fiscal year ended September 30, 2015, we decreased previously recorded unrecognized tax benefits by $0.2 million, of which $0.1 million was recognized in income tax benefit from continuing operations and $0.1 million was recognized in income tax expense from discontinued operations. During the fiscal years ended September 30, 2014 and 2013, there were no material increases or decreases in unrecognized tax benefits. As of September 30, 2015 and 2014, we had approximately $0.3 million and $0.4 million, respectively, of interest and penalties accrued as tax liabilities on our balance sheet.

As of September 30, 2015, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $434.4 million which begin to expire in 2021. As of September 30, 2015, the Company had foreign net operating loss carryforwards of $0.5 million which began to expire in 2019, as well as state net operating loss carryforwards of approximately $243.0 million which began to expire in 2015. As of September 30, 2015, the Company also had tax credits (primarily foreign income and U.S. research and development tax credits) of approximately $3.0 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. The Company prepared an Internal Revenue Code 382 analysis to determine the annual limitations on the Company's consolidated net operating loss carryforwards. As a result of the $434.4 million of U.S. net operating loss carryforwards, approximately $247.3 million is subject to an annual limitation and $187.1 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.

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, 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
Adjustments based on tax positions related to the current year	—
Adjustments based on tax positions of prior years	(207		)
Balance as of September 30, 2015	$	413

We believe that it is reasonably possible that all of the uncertain tax position will be paid or settled within the next 12 months. We file income tax returns in the U.S. federal, state, and local jurisdictions. In April 2015 the IRS completed its exam of the September 30, 2012 tax return and the Company was notified there were no changes to the originally filed return. 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 2012 for the U.S. federal, after fiscal year 2011 for the State of New Mexico, and after fiscal year 2010 for the state of California.

Included in discontinued operations during the fiscal years ended September 30, 2015, 2014 and 2013 were $0.2 million, $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 resulted in cash refunds and a reduction of future payroll and compensation taxes.