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)	2018			2017			2016
Domestic	$	(16,752	)	$	10,632		$	1,735
Foreign	(1,150		)	(2,248		)	898
Income (loss) from continuing operations before income taxes	$	(17,902	)	$	8,384		$	2,633

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



Income tax (benefit) expense	For the Fiscal Years Ended September 30,
(in thousands)	2018			2017		2016
Federal:
Current	$	(502	)	$	135	$	—
Deferred	—			—		—
	(502		)	135		—
State:
Current	53			28		(117		)
Deferred	—			—		—
	53			28		(117		)
Foreign:
Current	—			—		131
Deferred	—			—		—
	—			—		131
Total income tax (benefit) expense	$	(449	)	$	163	$	14

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)	2018			2017			2016
Income tax benefit computed at U.S. federal statutory rate	$	(4,346	)	$	2,841		$	896
State tax expense benefit, net of U.S. federal effect	(168		)	414			(41		)
Foreign tax rate differential	36			229			(94		)
Effect due to change in tax rate	57,988			2,528			626
Shortfall (windfall) from stock based compensation	681			(150		)	—
Other	216			126			(57		)
State net operating loss carryforward adjustment	(305		)	933			685
Change in valuation allowance	(54,551		)	(6,758		)	(2,001		)
Income tax (benefit) expense	$	(449	)	$	163		$	14
Effective tax rate	(2.5		)%	1.9		%	0.5		%

Significant components of our deferred tax assets are as follows:



Deferred Tax Assets	As of September 30
(in thousands)	2018			2017
Deferred tax assets:
Federal net operating loss carryforwards	$	91,639		$	144,455
Foreign net operating loss carryforwards	1,301			587
Income tax credit carryforwards	2,671			3,211
Inventory reserves	2,065			2,037
Accounts receivable reserves	123			8
Accrued warranty reserve	144			249
State net operating loss carryforwards	4,624			4,525
Stock compensation	728			2,367
Deferred compensation	200			349
Fixed assets and intangibles	(33		)	136
Other	838			927
Total deferred tax assets	104,300			158,851
Valuation allowance	(104,300		)	(158,851		)
Net deferred tax assets	$	—		$	—

For the fiscal years ended September 30, 2018, 2017 and 2016, the Company recorded income tax benefit (expense) from continuing operations of approximately $0.4 million, $(0.2) million and $(14,000), respectively. For the fiscal years ended September 30, 2018, 2017 and 2016, the Company recorded income tax benefit from discontinued operations of $0, $0 and $24,000, respectively. Income tax benefit for fiscal year ended September 30, 2018 is primarily comprised of the effect of the Tax Act which eliminates AMT and will result in a refund to the Company of amounts paid in prior fiscal years, state minimum taxes, and foreign tax expense included within continuing operations.

For the fiscal years ended September 30, 2018, 2017 and 2016, the effective tax rate on continuing operations was (2.5)%, 1.9% and 0.5%, respectively. The higher beneficial tax rate for fiscal year 2018 was primarily due to the effect of the Tax Act, which resulted in a credit to the Company on future tax payments for past AMT amounts paid and the fiscal year 2018 operating loss. 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. The Company uses some estimates to forecast permanent differences between book and tax accounting.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 34% to 21% effective January 1, 2018. Consequently, the Company recorded a decrease to the tax effected U.S. net deferred tax assets of $58.0 million, which was primarily offset by a change in the valuation allowance.

The Tax Act also includes other items such as limitations on the deductibility of executive compensation, immediate expensing of qualified property, the creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”), global Intangible Low Taxed Income (“GILTI”) tax and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). The Company evaluated the applicability of these items and appropriately reflected them in the tax provision as of September 30, 2018.

In the fourth quarter of fiscal 2018, we recorded an adjustment to the provisional amounts originally recorded in the first and second quarters of fiscal 2018 related to the re-measurement of net DTA. This adjustment was $58.0 million.

During fiscal 2018, we recorded a tax benefit of $0.5 million related to the Tax Act related to the credit on future tax payments for past AMT amounts paid.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional estimates when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The final impact of the Tax Act may differ from the above provisional estimates due to changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, by changes in accounting standard for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts. We have determined that the $0.5 million of tax benefit for the credit on future tax payments for past AMT amounts paid and the $58.0 million of tax expense for DTA re-measurement were each provisional amounts and reasonable estimates for fiscal 2018. Estimates used in the provisional amounts include: the anticipated reversal pattern of the gross DTAs; and earnings and foreign taxes attributable to foreign subsidiaries.

All deferred tax assets have a full valuation allowance at September 30, 2018. 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 year ended September 30, 2016, we decreased previously unrecognized tax benefits by $0.1 million. 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. As of September 30, 2018 and 2017, we had approximately $0.4 million and $0.3 million, respectively of interest and penalties accrued as tax liabilities on our balance sheet.

As of September 30, 2018, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $436.4 million which begin to expire in 2022. As of September 30, 2018, the Company had foreign net operating loss carryforwards of $5.2 million which begin to expire in 2021, as well as state net operating loss carryforwards of approximately $53.0 million which begin to expire in 2019. As of September 30, 2018, the Company also had tax credits (primarily foreign income and U.S. research and development tax credits) of approximately $2.7 million. The research credits will begin to expire in 2019. 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 $436.4 million of U.S. net operating loss carryforwards, approximately $219.5 million is subject to an annual limitation and $216.9 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, 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
Adjustments based on tax positions related to the current year	—
Adjustments based on tax positions of prior years	—
Balance as of September 30, 2018	$	419

As of September 30, 2018 and 2017, we had approximately $0.4 million and $0.3 million, respectively of interest and penalties accrued as tax liabilities on our balance sheet. We believe that it is reasonably possible that none 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 2014 for the U.S. federal, after fiscal year 2013 for the State of New Mexico, and after fiscal year 2013 for the state of California.

Included in discontinued operations during the fiscal year ended September 30, 2016 was $0.4 million 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 were no incentive tax credits received during the fiscal years ended September 30, 2018 and 2017.