Income and other Taxes

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



Income (loss) from continuing operations before income taxes	For the Fiscal Years Ended September 30,
(in thousands)	2017			2016		2015
Domestic	$	10,632		$	1,735	$	(5,713	)
Foreign	(2,248		)	898		1,250
Income (loss) from continuing operations before income taxes	$	8,384		$	2,633	$	(4,463	)

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



Income tax expense (benefit)	For the Fiscal Years Ended September 30,
(in thousands)	2017		2016			2015
Federal:
Current	$	135	$	—		$	—
Deferred	—		—			(1,835		)
	135		—			(1,835		)
State:
Current	28		(117		)	—
Deferred	—		—			(356		)
	28		(117		)	(356		)
Foreign:
Current	—		131			—
Deferred	—		—			—
	—		131			—
Total income tax expense (benefit)	$	163	$	14		$	(2,191	)

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)	2017			2016			2015
Income tax benefit computed at U.S. federal statutory rate	$	2,841		$	896		$	(1,518	)
State tax expense benefit, net of U.S. federal effect	414			(41		)	(356		)
Foreign tax rate differential	229			(94		)	(269		)
Effect due to change in tax rate	2,528			626			—
Windfall from stock based compensation	(150		)	—			—
Other	126			(57		)	108
State net operating loss carryforward adjustment	933			685			—
Change in valuation allowance	(6,758		)	(2,001		)	(156		)
Income tax expense (benefit)	$	163		$	14		$	(2,191	)
Effective tax rate	1.9		%	0.5		%	49.1		%

Significant components of our deferred tax assets are as follows:



Deferred Tax Assets	As of September 30, 2017			As of September 30, 2016
(in thousands)	As of September 30, 2017			As of September 30, 2016
Deferred tax assets:
Federal net operating loss carryforwards	$	144,455		$	147,449
Foreign net operating loss carryforwards	587			51
Income tax credit carryforwards	3,211			3,062
Inventory reserves	2,037			2,614
Accounts receivable reserves	8			14
Accrued warranty reserve	249			328
State net operating loss carryforwards	4,525			7,009
Stock compensation	2,367			3,334
Deferred compensation	349			896
Fixed assets and intangibles	136			124
Other	927			728
Total deferred tax assets	158,851			165,609
Valuation allowance	(158,851		)	(165,609		)
Net deferred tax assets	$	—		$	—

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, 2017, 2016 and 2015, the Company recorded income tax (expense) benefit from continuing operations of approximately $(0.2) million, $0 and $2.2 million, respectively. For the fiscal years ended September 30, 2017, 2016 and 2015, the Company recorded income tax benefit (expense) from discontinued operations of approximately $0, $24,000 and $(26.5) million, respectively. Income tax expense is comprised of estimated alternative minimum tax allocated between continuing operations and discontinued operations as prescribed by ASC 740 and foreign tax expense included within continuing operations.

For the fiscal years ended September 30, 2017, 2016 and 2015, the effective tax rate on continuing operations was 1.9%, 0.5%, and 49.1%, respectively. The higher tax rate for fiscal year 2017 was primarily due to higher alternative minimum tax as a result of the increase in net income. The lower tax rate for fiscal year 2016 was primarily due to permanent differences, state tax benefits, foreign tax rate differentials and changes in the Company's results in the current year as compared to the prior year. The higher tax rate for fiscal year 2015 was primarily due to permanent differences, state tax benefits and foreign tax rate differentials. 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, 2017 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries.

All deferred tax assets have a full valuation allowance at September 30, 2017. 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, 2017, we increased previously unrecognized tax benefits by $0.1 million related to foreign taxes. During the fiscal years ended September 30, 2016 and 2015, we decreased previously unrecognized tax benefits by $0.1 million and $0.2 million, respectively. Of the fiscal year 2016 amount of unrecognized tax benefits, $112,800 was recognized in income tax expense from continuing operations and $12,000 was recognized in income tax expense from discontinued operations. Of the fiscal year 2015 amount, $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. As of September 30, 2017 and September 30, 2016, we had approximately $0.3 million of interest and penalties accrued as tax liabilities on our balance sheet.

As of September 30, 2017, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $424.9 million which begin to expire in 2021. As of September 30, 2017, the Company had foreign net operating loss carryforwards of $2.3 million which begin to expire in 2021, as well as state net operating loss carryforwards of approximately $52.5 million which begin to expire in 2018. As of September 30, 2017, the Company also had tax credits (primarily foreign income and U.S. research and development tax credits) of approximately $3.2 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 $424.9 million of U.S. net operating loss carryforwards, approximately $226.5 million is subject to an annual limitation and $198.4 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.

The Company’s Board of Directors has adopted a Tax Benefits Preservation Plan (the “Rights Plan”) to help preserve the value of our net operating losses and tax credit carryforwards by reducing the risk of limitation of these deferred tax assets. The Rights Plan was approved by the Company’s shareholders on March 10, 2015. On September 26, 2017, the Company extended the final expiration date of the rights contained therein from October 3, 2107 to October 3, 2018 (subject to earlier expiration as described in the Rights Plan). The Company expects to submit the extension of the Rights Plan to shareholders for approval at the Company's 2018 annual meeting of shareholders. The Rights Plan is intended to reduce the likelihood that the Company will experience an ownership change for purposes of Internal Revenue Code Section 382 by discouraging any person or group from becoming a “5% shareholder” or increasing their ownership of the Company’s common stock if they are already a “5% shareholder.”

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, 2015	$	413
Adjustments based on tax positions related to the current year	—
Adjustments based on tax positions of prior years	(125		)
Balance as of September 30, 2016	288
Adjustments based on tax positions related to the current year	131
Adjustments based on tax positions of prior years	—
Balance as of September 30, 2017	$	419

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 2013 for the U.S. federal, after fiscal year 2012 for the State of New Mexico, and after fiscal year 2012 for the state of California.

Included in discontinued operations during the fiscal years ended September 30, 2016 and 2015 were $0.4 million and $0.2 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. There was no incentive tax credit received during the fiscal year ended September 30, 2017.