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)	2019			2018			2017
Domestic	$	(35,100	)	$	(16,752	)	$	10,632
Foreign	(830		)	(1,150		)	(2,248		)
Income (loss) from continuing operations before income taxes	$	(35,930	)	$	(17,902	)	$	8,384

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



Income tax (benefit) expense	For the Fiscal Years Ended September 30,
(in thousands)	2019		2018			2017
Federal:
Current	$	—	$	(502	)	$	135
Deferred	—		—			—
	—		(502		)	135
State:
Current	54		53			28
Deferred	—		—			—
	54		53			28
Foreign:
Current	—		—			—
Deferred	—		—			—
	—		—			—
Total income tax (benefit) expense	$	54	$	(449	)	$	163

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)	2019			2018			2017
Income tax (benefit) expense computed at U.S. federal statutory rate	$	(7,540	)	$	(4,346	)	$	2,841
State tax expense benefit, net of U.S. federal effect	(906		)	(168		)	414
Foreign tax rate differential	(28		)	36			229
Effect due to change in tax rate	(183		)	57,988			2,528
Shortfall (windfall) from stock based compensation	248			681			(150		)
Other	223			216			126
State net operating loss carryforward adjustment	139			(305		)	933
Change in valuation allowance	8,101			(54,551		)	(6,758		)
Income tax expense (benefit)	$	54		$	(449	)	$	163
Effective tax rate	0.2		%	(2.5		)%	1.9		%

Significant components of our deferred tax assets are as follows:



Deferred Tax Assets	As of September 30
(in thousands)	2019			2018
Deferred tax assets:
Federal net operating loss carryforwards	$	99,298		$	91,639
Foreign net operating loss carryforwards	1,271			1,301
Income tax credit carryforwards	2,671			2,671
Inventory reserves	3,535			2,065
Accounts receivable reserves	50			123
Accrued warranty reserve	153			144
State net operating loss carryforwards	6,174			4,624
Stock compensation	704			728
Deferred compensation	404			200
Fixed assets and intangibles	(2,693		)	(33		)
Other	2,255			838
Total deferred tax assets	113,822			104,300
Valuation allowance	(113,891		)	(104,300		)
Net deferred tax liabilities	$	(69	)	$	—

For the fiscal years ended September 30, 2019, 2018 and 2017, the Company recorded income tax (expense) benefit of approximately $0.1 million, $(0.4) million and $0.2 million, respectively. Income tax expense for the fiscal years ended September 30, 2019 is primarily comprised of state minimum tax expense. Income tax benefit for the fiscal year ended September 30, 2018 is primarily comprised of the effect of the December 22, 2017 “Tax Act” which eliminated AMT and resulted in a refund to the Company of amounts paid in prior fiscal years, state minimum taxes, and foreign tax expense. for the fiscal year ended September 30, 2017, income tax expense is primarily comprised of estimated alternative minimum tax.

For the fiscal years ended September 30, 2019, 2018 and 2017, the effective tax rate on operations was 0.2%, (2.5)% and 1.9%, respectively. The lower tax rate for the fiscal year ended September 30, 2019 is primarily due to the operating loss and state minimum tax expense. The higher beneficial tax rate for the fiscal year ended September 30, 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 current period 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. Income tax expense is comprised of estimated alternative minimum tax and foreign tax expense. The Company uses some estimates to forecast permanent differences between book and tax accounting.

We have not provided for income taxes on non-U.S. subsidiaries' undistributed earnings as of September 30, 2019 because we plan to indefinitely reinvest the unremitted earnings of our non-U.S. subsidiaries and all of our non-U.S. subsidiaries historically have negative earnings and profits.

All deferred tax assets have a full valuation allowance at September 30, 2019. However, on a quarterly basis, the Company will evaluate the positive and negative evidence to assess whether the more likely than not criteria, has been satisfied in determining whether there will be further adjustments to the valuation allowance.

During the fiscal years ended September 30, 2019 and 2018, there were no material increases or decreases in unrecognized tax benefits.

As of September 30, 2019, the Company had net operating loss carryforwards for U.S. federal income tax purposes of approximately $472.8 million which begin to expire in 2022. As of September 30, 2019, the Company had foreign net operating loss carryforwards of $5.1 million which begin to expire in 2021, as well as state net operating loss carryforwards of approximately $71.2 million which begin to expire in 2021. As of September 30, 2019, 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 2020. 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 $472.8 million of U.S. net operating loss carryforwards, approximately $230.5 million is subject to an annual limitation and $242.3 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, 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
Adjustments based on tax positions related to the current year	—
Adjustments based on tax positions of prior years	—
Balance as of September 30, 2019	$	419

As of September 30, 2019 and September 30, 2018, we had approximately $0.5 million and $0.4 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 positions will be paid or settled within the next 12 months. Interest that is accrued on tax liabilities is recorded within interest expense on the condensed consolidated statements of operations.