Income Taxes

Loss before income taxes for the fiscal years ended March 31, 2018, 2017, and 2016 are provided in the table as follows (in thousands):



	Fiscal years ended March 31,
	2018			2017			2016
Loss before income tax expense:
U.S.	$	(100,341	)	$	(31,664	)	$	(29,436	)
Foreign	67,404			5,433			8,688
Total	$	(32,937	)	$	(26,231	)	$	(20,748	)

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



	Fiscal years ended March 31,
	2018			2017			2016
Current
Federal	$	374		$	765		$	459
State	—			—			—
Foreign	592			619			1,950
Total current	966			1,384			2,409

Deferred
Federal	(1,086		)	60			(18		)
State	—			—			—
Foreign	(41		)	(302		)	—
Total deferred	(1,127		)	(242		)	(18		)

Income tax (benefit) expense	$	(161	)	$	1,142		$	2,391

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,
	2018		2017		2016
Statutory federal income tax rate	(31	)%	(34	)%	(34	)%
Federal rate change	351		—		—
State income taxes, net of federal benefit	(3	)	—		1
Deemed dividend and dividends paid	7		20		5
Foreign income tax rate differential	(62	)	(1	)	5
Stock options	—		—		1
Research and development tax credit	(1	)	(2	)	(5	)
Deferred warrants	(1	)	(2	)	—
Reversal of uncertain tax benefits	(3	)	—		—
True-up of NOLs	11		(40	)	19
Settlement of intercompany balances	—		—		(9	)
Nondeductible foreign currency exchange remeasurement loss	—		—		10
Valuation allowance	(268	)	63		18
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, 2018			March 31, 2017
Deferred tax assets:
Net operating loss carryforwards	$	210,194		$	297,961
Research and development and other tax credit carryforwards	12,828			11,965
Accruals and reserves	22,406			26,222
Fixed assets and intangible assets	1,568			2,250
Other	12,996			12,454
Gross deferred tax assets	259,992			350,852
Valuation allowance	(227,686		)	(315,092		)
Total deferred tax assets	32,306			35,760

Deferred tax liabilities:
Intercompany debt	(29,130		)	(25,841		)
Other	(2,744		)	(9,637		)
Total deferred tax liabilities	(31,874		)	(35,478		)
Net deferred tax asset	$	432		$	282

On December 22, 2017, the Act was signed into law. ASC Topic 740 requires deferred tax assets and liabilities to be measured using the enacted rate for the period in which they are expected to reverse. The SEC staff issued Staff Accounting Bulletin No. 118, which provides guidance for companies that have not completed their accounting for the income tax effects of the Act in the period of enactment, allowing for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. Accordingly, the new 21% U.S. Federal corporate tax rate was used to measure the U.S. deferred tax assets and liabilities that will reverse in future periods and the Company recorded a reduction for the change in corporate income tax rate from 34% to 21% of $116.3 million to deferred tax assets and the valuation allowance. The Company's deferred tax attributes are generally subject to a full valuation allowance in the U.S. and thus, this adjustment to the attributes did not impact the tax provision. In addition, the new legislation includes a one-time transition tax in which all foreign earnings are deemed to be repatriated to the U.S. and taxable at specified rates included within the Act. The Company reviewed the accumulated foreign earnings aggregated across all non U.S. subsidiaries, net of foreign deficits. The Company believes it is in an aggregate net foreign deficit position for U.S. tax purposes and therefore not liable for the transition tax. The Company made reasonable estimates and does not anticipate significant revisions to the accounting for the tax impact of the Act, but has not completed the accounting for the tax effects of the Act at March 31, 2018. The Company will continue to assess its provision for income taxes as future guidance is issued, but does not currently anticipate significant revisions will be necessary. The ultimate impact may differ from the Company's provisional estimates, possibly materially, due to additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be used and actions the Company may take as a result of the Act. The accounting is expected to be complete within the one year measurement period in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.

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 its deferred tax asset of $18.0 million 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, 2018, the Company’s valuation allowance decreased by approximately $87.4 million, primarily due to the tax effect of the Company's change in income tax rate from 34% to 21% offset by an increase in the Company’s net operating loss.

At March 31, 2018, the Company had aggregate net operating loss carryforwards in the U.S. for federal and state income tax purposes of approximately $871.0 million and $232.0 million, respectively, which expire in the years ending March 31, 2018 through 2038. For U.S. federal tax purpose, approximately $89.0 million of Federal net operating losses have an indefinite carryforward period. Included in the U.S. net operating loss are $3.7 million of acquired losses from Power Quality Systems, Inc. and $0.3 million of acquired losses from Infinia Technology Corporation. Research and development and other tax credit carryforwards amounting to approximately $9.5 million and $3.3 million are available to offset federal and state income taxes, respectively, and will expire in the years ending March 31, 2019 through 2038.

At March 31, 2018, the Company had aggregate net operating loss carryforwards for its Austrian subsidiary, AMSC Austria GmbH, of approximately $46.5 million which can be carried forward indefinitely subject to certain annual limitations. At March 31, 2018, the Company had aggregate net operating loss carryforwards for its Chinese operation of approximately $11.7 million, which can be carried forward for five years and begin to expire December 31, 2018. 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 net operating loss ("NOL") and general business tax credit carryforwards it may have. The Company updated its study through June 15, 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. After completing this study, the Company has concluded that the limitation will not have a material impact on its ability to utilize its NOL carryforwards. If there were material ownership changes subsequent to the study, such changes could limit the Company's ability to utilize its NOL carryforwards. The Company increased its NOL’s by $0.3 million due to acquired losses in the fiscal year ended March 31, 2018 from ITC. The Company conducted a study on the acquired NOL and concluded that the limitations under Section 382 will not have a material impact on its ability to utilize its NOL carryforwards

The total amount of undistributed foreign earnings available to be repatriated at March 31, 2018 was $2.6 million resulting in the recording of a $0.1 million deferred tax liability for foreign withholding taxes.

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, 2018. The Company did not have any gross unrecognized tax benefits at March 31, 2018 or 2017.

There were no reversals of uncertain tax positions in the years ended March 31, 2018, 2017 and 2016.

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.

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, 1996 through 2018 remain open and subject to examination. 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.

All fiscal years from the year ended March 31, 2013 through 2018 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 2018 remain open and subject to examination. Tax filings in Romania for the years ended March 31, 2014 through 2018 remain open and subject to examination.