Income Taxes

For financial reporting purposes, income before income taxes includes the following (in thousands):



Years ended December 31:	2012			2011			2010

United States	$	(11,018	)	$	(10,916	)	$	(6,557	)
Foreign	2,830			6,373			6,934
Total	$	(8,188	)	$	(4,543	)	$	377

The provision for income taxes consists of the following (in thousands):



Years ended December 31:	2012			2011			2010
Current:
State	300			69			43
Foreign	1,664			2,029			3,245
Total current	1,964			2,098			3,288
Deferred:
Federal	(3,019		)	(1,813		)	—
State	(614		)	(369		)	—
Foreign	656			(1,107		)	(3,756		)
Total deferred	(2,977		)	(3,289		)	(3,756		)
Total	$	(1,013	)	$	(1,191	)	$	(468	)

The income tax provision differs from the amount computed by applying the federal statutory income tax rate to income before income taxes as follows:



Years ended December 31:	2012		2011		2010
Income tax provision, at statutory federal rate	34	%	34	%	34	%
State and local income taxes, net of federal income taxes effect	6		16		217
Credits	5		—		—
Permanent differences	(7	)	(40	)	327
Goodwill impairment	(4	)	—		—
Foreign taxes at rates different than domestic rates	(1	)	5		336
Change in tax rates	—		75		—
Change in valuation allowance	(20	)	(64	)	(1,039	)
Total	13	%	26	%	(125	)%

The components of deferred income taxes consist of the following (in thousands):



December 31:	2012			2011
Allowance for doubtful accounts	$	275		$	291
Inventory reserve	1,933			1,837
Accrued liabilities	3,094			2,985
Other	6,052			6,691
	11,354			11,804
Valuation allowance	(10,209		)	(10,687		)
Net current deferred income tax assets	1,145			1,117
Net operating losses	89,742			112,199
Tax credits	758			775
Depreciation and amortization	433			(1,985		)
Investments	—			(38		)
Capital loss carry forwards	40,739			41,510
	131,672			152,461
Valuation allowance	(127,961		)	(148,065		)
Net long-term deferred income tax asset	3,711			4,396
Total	$	4,856		$	5,513

MRV records valuation allowances against deferred income tax assets, when necessary, in accordance with ASC 740 Accounting for Income Taxes. Realization of deferred income tax assets, such as net operating loss ("NOL") carry forwards and income tax credits, is dependent on future taxable earnings and is therefore uncertain. At least quarterly, the Company assesses the likelihood that the deferred income tax asset balance will be recovered from future taxable income. To the extent management believes that recovery is unlikely, the Company establishes a valuation allowance against the deferred income tax asset, which increases income tax expense in the period such determination is made. During 2012 the Company recorded a decrease to the valuation allowance totaling $20.6 million against additional deferred income tax assets, principally domestic and foreign net operating losses. Although realization is not assured, management believes it is more likely than not that the net deferred income tax assets, which relate primarily to profitable foreign subsidiaries, will be realized.

The change in the valuation allowance is as follows:




December 31:	2012			2011			2010
Balance at beginning of period		($158.8	)		($136.8	)		($120.7	)
Decrease in Valuation Allowance	20.6			(22.0		)	(16.1		)
Balance at end of period	$	(138.2	)	$	(158.8	)	$	(136.8	)

As of December 31, 2012, MRV had federal, state, and foreign NOL carry forwards available of $173.7 million, $112.0 million and $90.8 million, respectively. For the year ended December 31, 2012, federal NOL carry forwards decreased by $53.7 million, and state net operating loss carry forwards decreased by $49.8 million. For federal and state income tax purposes, the NOLs are available to offset future taxable income through 2031. Certain foreign NOL carry forwards and tax credits are available indefinitely. As of December 31, 2012, federal and state capital loss carry forwards amounted to $110.3 million, and $47.1 million, respectively. The capital loss carry forwards, which were generated by the sale of Source Photonics, expire in 2015.

Under the provisions of ASC 718 Compensation — Stock Compensation, MRV recognizes tax benefits associated with the exercise of stock options and vesting of restricted stock directly to stockholders' equity only when realized. Accordingly, deferred tax assets are not recognized for NOL carry forwards resulting from these tax benefits occurring from January 1, 2006 onward. A tax benefit occurs when the actual tax benefit realized upon an employee's disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award. At December 31, 2012, deferred tax assets do not include $2.4 million of loss carryovers from share-based compensation.

MRV has not recorded U.S. income tax expense for foreign earnings that it has declared as indefinitely reinvested offshore, thus reducing its overall income tax expense. At December 31, 2012, MRV had approximately $23.8 million of accumulated but undistributed earnings at certain foreign entities. The amount of earnings designated as indefinitely reinvested offshore is based upon our expectations of the future cash needs of the Company's foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be repatriated. In the event actual cash needs of the Company's U.S. entities exceed current expectations or the actual cash needs of the Company's foreign entities are less than expected, the Company may need to repatriate foreign earnings that have been designated as indefinitely reinvested offshore. This would result in recording additional U.S. income tax expense. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

The tax years 2000-2012 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months. No reserve was needed or recorded under ASC 740, as the topic relates to accounting for uncertainty in income taxes as of December 31, 2012.

Since the Company has a loss from continuing operations and income from discontinued operations, the Company has applied ASC 740-20-45-7 that results in a reclassification of income tax benefit from discontinued operations to continuing operations. The amount of benefit reclassified was $3.6 million in 2012 and $2.2 million in 2011.

The Company recognized an income tax expense of $4.6 million, $5.8 million, and a benefit of $3.9 million for the years ended December 31, 2012, 2011 and 2010, respectively, with respect to its discontinued operations.