Income Taxes

Loss before income taxes for the fiscal years ended March 31, 2017, 2016, and 2015 are provided in the table as follows (in thousands):



	Fiscal years ended March 31,
	2017			2016			2015
Loss before income tax expense:
U.S.	$	(31,664	)	$	(29,436	)	$	(40,277	)
Foreign	5,433			8,688			(8,563		)
Total	$	(26,231	)	$	(20,748	)	$	(48,840	)

The components of income tax expense (benefit) attributable to continuing operations consist of the following (in thousands):



	Fiscal years ended March 31,
	2017			2016			2015
Current
Federal	$	765		$	459		$	47
State	—			—			—
Foreign	619			1,950			(274		)
Total current	1,384			2,409			(227		)

Deferred
Federal	60			(18		)	43
State	—			—			—
Foreign	(302		)	—			—
Total deferred	(242		)	(18		)	43

Income tax (benefit) expense	$	1,142		$	2,391		$	(184	)

The reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate is shown below.



	Fiscal years ended March 31,
	2017		2016		2015
Statutory federal income tax rate	(34	)%	(34	)%	(34	)%
State income taxes, net of federal benefit	—		1		2
Deemed dividend and dividends paid	20		5		1
Foreign income tax rate differential	(1	)	5		6
Stock options	—		1		1
Nondeductible expenses	—		—		1
Research and development tax credit	(2	)	(5	)	—
Deferred warrants	(2	)	—		(3	)
Reversal of uncertain tax benefits	—		—		(6	)
True-up of NOLs	(40	)	19		—
Settlement of intercompany balances	—		(9	)	—
Nondeductible foreign currency exchange remeasurement loss	—		10		—
Valuation allowance	63		18		32
Effective income tax rate	4	%	11	%	—	%

The following is a summary of the principal components of the Company’s deferred tax assets and liabilities (in thousands):



	March 31, 2017			March 31, 2016
Deferred tax assets:
Net operating loss carryforwards	$	297,961		$	281,098
Research and development and other tax credit carryforwards	11,965			11,878
Accruals and reserves	26,222			28,088
Fixed assets and intangible assets	2,250			2,393
Other	12,454			14,494
Gross deferred tax assets	350,852			337,951
Valuation allowance	(315,092		)	(301,393		)
Total deferred tax assets	35,760			36,558

Deferred tax liabilities:
Intercompany debt	(25,841		)	(27,117		)
Other	(9,637		)	(9,408		)
Total deferred tax liabilities	(35,478		)	(36,525		)
Net deferred tax asset	$	282		$	33

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation- Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the consolidated statements of cash flows. This amendment is effective for annual periods beginning after December 15, 2016 and early adoption is permitted. The Company elected to early adopt the new guidance in the fourth quarter of fiscal 2016 which requires them to reflect any adjustments as of April 1, 2016, the beginning of the annual period that includes the interim period of adoption. The Company has not changed the way it accounts for forfeitures. Prior to April 1, 2016, the Company recognized the excess tax benefits of stock-based compensation expense as additional paid-in capital ("APIC"), and tax deficiencies of stock-based compensation expense in the income tax provision or as APIC to the extent that there were sufficient recognized excess tax benefits previously recognized. As a result of the prior guidance that the excess tax benefits reduce taxes payable prior to being recognized as an increase in capital, the Company had not recognized certain deferred tax assets (all tax attributes such as loss ) that could be attributed to tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Effective April 1, 2016, the Company early adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting. No prior periods were restated as a result of this change in accounting policy as the Company previously maintained a valuation allowance against its deferred tax assets that could be attributed to equity compensation in excess of compensation recognized for financial reporting. As a result of the early adoption of ASU 2016-09, the Company recognized an increase to their deferred tax asset of $18.0M offset by an increase in the Company’s valuation allowance. There was no impact to the Company’s financial statements as a result of the adoption

The Company has provided a full valuation allowance against its net deferred income tax assets since it is more likely than not that its deferred tax assets are not currently realizable due to the net operating losses incurred by the Company since its inception and net operating losses forecasted in the future. During the year ended March 31, 2017, the Company’s valuation allowance increased by approximately $13.7M, primarily due to the increase in the Company’s net operating loss. The Company has recorded a deferred tax asset of approximately $13.0 million reflecting the benefit of deductions from the exercise of stock options. This deferred tax asset has been fully reserved since it is more likely than not that the tax benefit from the exercise of stock options will not be realized.

At March 31, 2017, the Company had aggregate net operating loss carryforwards in the U.S. for federal and state income tax purposes of approximately $798.0 million and $143.0 million, respectively, which expire in the years ending March 31, 2018 through 2037. Included in the U.S. net operating loss is $3.7 million of acquired losses from Power Quality Systems, Inc. Research and development and other tax credit carryforwards amounting to approximately $9.5 million and $3.2 million are available to offset federal and state income taxes, respectively, and will expire in the years ending March 31, 2018 through 2037.

At March 31, 2017, the Company had aggregate net operating loss carryforwards for its Austrian subsidiary, AMSC Austria GmbH, of approximately $37.1 million which can be carried forward indefinitely subject to certain annual limitations. At March 31, 2017, the Company had aggregate net operating loss carryforwards for its Chinese operation of approximately $17.9 million, which can be carried forward for five years and begin to expire December 31, 2017. Also the Company had immaterial amounts of current and net operating loss carryforwards for its other foreign operations which can be carried forward indefinitely.

Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the “IRC”), provides limits on the extent to which a corporation that has undergone an ownership change (as defined) can utilize any NOL and general business tax credit carryforwards it may have. The Company conducted a study as a result of the April 2015 equity offering to determine whether Section 382 could limit the use of its carryforwards in this manner. After completing this study, the Company has concluded that the limitation will not have a material impact on its ability to utilize its net operating loss carryforwards. If there were material ownership changes subsequent to the study it could limit the ability to utilize its net operating loss carryforwards. The Company plans to conduct a study during fiscal 2017 as a result of the May 2017 equity offering to determine whether Section 382 could limit the use of its carryforwards in this manner.

The Company has not recorded a deferred tax asset for the temporary difference associated with the excess of its tax basis over the book basis in its Austrian and Chinese subsidiaries as the future tax benefit is not expected to reverse in the foreseeable future.

The Company has recorded a deferred tax liability as of March 31, 2017 for the undistributed earnings of its remaining foreign subsidiaries for which it can no longer assert are permanently reinvested. The total amount of undistributed earnings available to be repatriated at March 31, 2017 was $2.1 million resulting in the recording of a $0.7 million net deferred federal and state income tax liability.

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company did not identify any uncertain tax positions at March 31, 2017. The Company did not have any gross unrecognized tax benefits at March 31, 2017 or 2016.

During the fiscal year ended March 31, 2015, the Company concluded a tax audit for the period April 1, 2008 through March 31, 2011 with its foreign subsidiary in Austria. The results of this audit found no material exceptions to the Company’s tax positions.

There were no reversals of uncertain tax positions in the years ended March 31, 2017 and 2016. During the fiscal period ended March 31, 2015, the Company reversed uncertain tax positions of $1.1 million.

The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. Any unrecognized tax benefits, if recognized, would favorably affect its effective tax rate in any future period. The Company does not expect that the amounts of unrecognized benefits will change significantly within the next twelve months. Interest and penalties recorded in prior periods were immaterial and subsequently reversed in the year ended March 31, 2015.

The Company conducts business globally and, as a result, its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Major tax jurisdictions include the U.S., China, Romania and Austria. All U.S. income tax filings for fiscal years ended March 31, 1995 through 2016 remain open and subject to examination and all fiscal years from the year ended March 31, 2012 through 2016 remain open and subject to examination in Austria. The Company’s tax filings in China for calendar years 2013 and 2014 were examined with no material exceptions. Although the 2013 and 2014 tax years in China were audited, they remain subject to further review until the statute of limitations has expired. The statute of limitations in China for the tax authorities to audit is generally three years. Tax filings in China for calendar years 2008 through 2012 and 2015 through 2016 remain open and subject to examination. Tax filings in Romania for the years ended March 31, 2014 through 2016 remain open and subject to examination.