Income Taxes

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



Years ended December 31:	2014			2013			2012
United States	$	(7,993	)	$	(4,096	)	$	(11,018	)
Foreign	141			(1,218		)	2,830
Loss before provision for income taxes	$	(7,852	)	$	(5,314	)	$	(8,188	)

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



Years ended December 31:	2014			2013			2012
Current:
State	$	(89	)	$	(56	)	$	300
Foreign	2,470			1,621			1,664
Total current	2,381			1,565			1,964
Deferred:
Federal	—			—			(3,019		)
State	—			—			(614		)
Foreign	1,922			(57		)	656
Total deferred	1,922			(57		)	(2,977		)
Provision (benefit) for income taxes	$	4,303		$	1,508		$	(1,013	)

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



Years ended December 31:	2014		2013		2012
Income tax provision, at statutory federal rate	34	%	34	%	34	%
State and local income taxes, net of federal income taxes effect	6		5		6
Credits	—		—		5
Permanent differences	(10	)	(13	)	(7	)
Goodwill impairment	—		—		(4	)
Fiberxon settlement	—		—		—
Foreign taxes at rates different than domestic rates	(4	)	(7	)	(1	)
Change in valuation allowance	(76	)	(49	)	(20	)
Change in reserve for uncertain tax positions	—		(3	)	—
Other adjustments	(5	)	5		—
Effective tax rate	(55	)%	(28	)%	13	%

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



December 31:	2014			2013
Allowance for doubtful accounts	$	389		$	415
Inventory reserve	2,814			1,954
Accrued liabilities	2,846			2,694
Other	5,446			5,791
	11,495			10,854
Valuation allowance	(10,960		)	(9,635		)
Net current deferred income tax assets	535			1,219

Net operating losses	91,085			88,086
Depreciation and amortization	370			439
Capital loss carry forwards	38,755			38,951
	130,210			127,476
Valuation allowance	(128,105		)	(123,782		)
Net long-term deferred income tax asset	2,105			3,694
Total deferred income taxes	$	2,640		$	4,913

MRV records valuation allowances against deferred income tax assets, when necessary. 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 the year ended December 31, 2014, the Company recorded an increase to the valuation allowance totaling $5.6 million against deferred income tax assets from: (1) $2.6 million and $1.1 million of deferred tax assets principally from current year domestic and foreign net operating losses; and (2) $1.9 million of deferred tax assets principally from prior year foreign net operating losses, respectively, that do not meet the more likely than not threshold for realization. Our unreserved net deferred tax assets amounted to $2.6 million at December 31, 2014, which was exclusively part of our Israeli subsidiary operations; and $4.9 million at December 31, 2013, which were part of our Israeli and German subsidiaries operations.

The change in the valuation allowance is as follows (in millions):



December 31:	2014			2013			2012
Balance at beginning of period	$	(133.4	)	$	(138.2	)	$	(158.8	)
(Increase) decrease in valuation allowance	(5.6		)	4.8			20.6
Balance at end of period	$	(139.0	)	$	(133.4	)	$	(138.2	)

As of December 31, 2014, MRV had federal, state, and foreign NOL carry-forwards available of $179.7 million, $100.7 million and $97.3 million, respectively. For the year ended December 31, 2014, federal NOL carry-forwards increased by $7.4 million, and state net operating loss carry-forwards increased by $7.9 million. For federal and state income tax purposes, the NOLs expire beginning in 2015 and are available to offset future taxable income through 2034. Certain foreign NOL carry-forwards and tax credits are available indefinitely. Additionally, the Company had capital loss carry-forwards of $110.5 million and $24.0 million for federal and state tax purposes, respectively as December 31, 2014. 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, 2014, the US federal and state NOLs had a full valuation allowance.

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. 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, 2014, deferred tax assets do not include $3.2 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, 2014, MRV had approximately $27.6 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 2002-2014 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 recorded for uncertainty in income taxes as of December 31, 2012.

During the year ended December 31, 2012, the Company reported a loss from continuing operations and income from discontinued operations, which resulted in a reclassification of income tax benefit from discontinued operations to continuing operations. The amount of the benefit reclassified was $3.6 million. The Company recognized income tax expense of $4.6 million for the year ended December 31, 2012 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:	2014			2013			2012
Balance at beginning of period	$	(134	)	$	—		$	—
Reductions related to prior year positions	34			(134		)	—
Balance at end of period	$	(100	)	$	(134	)	$	—

Substantially all of the uncertain tax benefits as of December 31, 2014, if recognized, would affect the effective tax rate. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The tax years 2001-2014 remain open to examination by the major taxing jurisdictions to which the Company is subject. Management does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

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.