Income Taxes

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



Years ended December 31:	2013			2012			2011

United States	$	(4,096	)	$	(11,018	)	$	(10,916	)
Foreign	(1,218		)	2,830			6,373
Total	$	(5,314	)	$	(8,188	)	$	(4,543	)

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



Years ended December 31:	2013			2012			2011
Current:
State	(56		)	300			69
Foreign	1,477			1,664			2,029
Total current	1,421			1,964			2,098
Deferred:
Federal	—			(3,019		)	(1,813		)
State	—			(614		)	(369		)
Foreign	87			656			(1,107		)
Total deferred	87			(2,977		)	(3,289		)
Total	$	1,508		$	(1,013	)	$	(1,191	)

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:	2013		2012		2011
Income tax provision, at statutory federal rate	34	%	34	%	34	%
State and local income taxes, net of federal income taxes effect	5		6		16
Credits	—		5		—
Permanent differences	(13	)	(7	)	(40	)
Goodwill impairment	—		(4	)	—
Foreign taxes at rates different than domestic rates	(7	)	(1	)	5
Change in tax rates	—		—		75
Change in valuation allowance	(49	)	(20	)	(64	)
Change in FIN 48 reserve	(3	)
Other adjustments	5		—		—
Total	(28	)%	13	%	26	%

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



December 31:	2013			2012
Allowance for doubtful accounts	$	415		$	275
Inventory reserve	1,954			1,933
Accrued liabilities	2,694			3,094
Other	5,791			6,052
	10,854			11,354
Valuation allowance	(9,635		)	(10,209		)
Net current deferred income tax assets	1,219			1,145
Net operating losses	88,086			89,742
Tax credits	—			758
Depreciation and amortization	439			433
Investments	—			—
Capital loss carry forwards	38,951			40,739
	127,476			131,672
Valuation allowance	(123,782		)	(127,961		)
Net long-term deferred income tax asset	3,694			3,711
Total	$	4,913		$	4,856

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 2013 the Company recorded a decrease to the valuation allowance totaling $4.8 million against additional deferred income tax assets, principally domestic and foreign net operating losses due to the use of 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:	2013			2012			2011
Balance at beginning of period		($138.2	)		($158.8	)		($136.8	)
Decrease in Valuation Allowance	4.8			20.6			(22		)
Balance at end of period	$	(133.4	)	$	(138.2	)	$	(158.8	)

As of December 31, 2013, MRV had federal, state, and foreign NOL carry forwards available of $172.3 million, $93.1 million and $95.8 million, respectively. For the year ended December 31, 2013, federal NOL carry forwards decreased by $0.4 million, and state net operating loss carry forwards decreased by $17.9 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, 2013, federal and state capital loss carry forwards amounted to $110.5 million, and $24.0 million, respectively. The capital loss carry forwards, which were generated by the sale of Source Photonics, expire in 2015. Under the Internal Revenue Code, if a corporation undergoes an "ownership change," the corporation's ability to use its pre-change NOLs, capital loss carry forwards and other pre-change tax attributes to offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. We may experience an ownership change in the future as a result of subsequent shifts in our stock ownership. If we were to trigger an ownership change in the future, our ability to use any NOLs and capital loss carry forwards existing at that time could be limited. As of December 31, 2013 , the US federal and state NOLs had a full valuation allowance.

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, 2013, deferred tax assets do not include $2.7 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, 2013, MRV had approximately $24.9 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.

In 2012 the Company had a loss from continuing operations and income from discontinued operations and 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.

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

The Company or one of its subsidiaries files income tax returns in the US federal jurisdiction, and various state and foreign jurisdictions. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):



December 31:	2013			2012		2011
Balance at beginning of period		$—			$—		$—
Additions related to prior year positions	(134		)	—		—
Balance at end of period	$	(134	)	$	—	$	—

Substantially all of the uncertain tax benefits as of December 31, 2013, if recognized, would affect the effective tax rate. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The tax years 2000-2013 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, 2013.

On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and determined they will not have a material impact on our consolidated results of operations, cash flows or financial position.

The Company's tax returns for the years 2006-2011 are currently under review by the Italian taxing authorities. The Company believes that its position is meritorious, and no additional liabilities have been recognized at December 31, 2013 relating to this examination.