11. Income Taxes

Income (loss) before income taxes for the years ended March 31, 2013, 2012, and 2011 are provided in the table as follows (in thousands):


		For the years ended March 31,
		2013		2012		2011
Income (loss) before income tax expense:
U.S.	$	(66,975)	$	(107,301)	$	(61,436)
Foreign		580		(28,157)		(108,895)
Total	$	(66,395)	$	(135,458)	$	(170,331)

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


		For the years ended March 31,
		2013	2012		2011
Current
Federal	$	94	-	$	-
State		-	-		-
Foreign		(438)	1,369		12,438
Total current		(344)	1,369		12,438

Deferred
Federal		93	-		(221)
State		-	-		(34)
Foreign		(13)	-		3,770
Total deferred		80	-		3,515

Income tax (benefit) expense	$	(264)	1,369	$	15,953

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


	For the years ended March 31,
	2013		2012		2,011
Statutory federal income tax rate	(34)	%	(34)	%	(34)	%
State income taxes, net of federal benefit	(3)		(2)		(1)
Deemed dividend	2		3		-
Foreign income tax rate differential	(2)		3		4
Stock options	(2)		1		1
Nondeductible expenses	1		-		-
Research and development tax credit	(1)		(1)		(1)
Goodwill Impairment	-		-		7
Interest expense	7		-		-
Valuation allowance	32		31		33
Effective income tax rate	-	%	1	%	9	%

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


		For the years ended March 31,
		2013		2012
Deferred tax assets:
Net operating loss carryforwards	$	239,040	$	225,640
Research and development and other tax credit carryforwards		10,112		9,251
Accruals and reserves		35,490		39,101
Fixed assets and intangible assets		4,101		2,316
Other		18,292		19,007
Gross deferred tax assets		307,035		295,315
Valuation allowance		(261,961)		(252,302)
Total deferred tax assets		45,074		43,013

Deferred tax liabilities:
Intercompany debt		(35,185)		(35,185)
Other		(9,979)		(7,828)
Total deferred tax liabilities		(45,164)		(43,013)
Net deferred tax liabilities	$	(90)	$	-

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. The Company has recorded a deferred tax asset of approximately $14.9 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. The tax benefit will be recorded as a credit to additional paid-in capital if realized.

At March 31, 2013, the Company has aggregate net operating loss carryforwards in the U.S. for federal and state income tax purposes of approximately $664.0 million and $292.0 million, respectively, which expire in the years ending March 31, 2014 through 2033. Included in the U.S. net operating losses of $664.0 million is $3.7 million of acquired losses from Power Quality Systems, Inc. and $52.4 million from excess tax deductions from stock option exercised in 2006 through 2013. Pursuant to the guidance on accounting for stock-based compensation, the deferred tax asset relating to excess tax benefits from these exercises was not recognized for financial statement purposes. The future benefit from these deductions will be recorded as a credit to additional paid-in capital when realized. Research and development and other tax credit carryforwards amounting to approximately $8.1 million and $3.2 million are available to offset federal and state income taxes, respectively, and will expire in the years ending March 31, 2014 through 2033.

At March 31, 2013, the Company has aggregate net operating loss carryforwards for its Austrian operation of approximately $64.4 million which can be carried forward indefinitely subject to certain annual limitations. AMSC China incurred net operating losses of $5.4 million and $13.8 million for the years ended March 31, 2013 and 2012, respectively, each of which can be carried forward for five years. 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 US 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 performed a study through February 25, 2010 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 was a material ownership change subsequent to the study it could limit the ability to utilize our net operating loss carryforwards.

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, 2013 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, 2013 was $1.5 million resulting in the recording of a $0.5 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 has gross unrecognized tax benefits of approximately $1.1 million at both March 31, 2013 and 2012. These amounts represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction of the Company’s effective tax rate.

During the quarter ended September 30, 2011, the Company concluded a tax audit for the period January 1, 2006 through March 31, 2008 with its foreign subsidiary in Austria. The results of the audit concluded that previously deducted amounts for certain trade-mark and management fees related to corporate affairs charges would no longer be tax deductible.

A tabular roll-forward of the Company’s uncertainties in income tax provision liability is presented below (in thousands):


Balance at March 31, 2011	$	297
Increase for tax positions		764
Balance at March 31, 2012		1,061
Increase for tax positions		-
Balance at March 31, 2013	$	1,061

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 12 months. Interest and penalties were recorded beginning in the year ended March 31, 2011 through March 31, 2013, but were immaterial amounts.

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 and Austria. All U.S. income tax filings for years ending March 31, 1995 through 2013 remain open and subject to examination and all years from the year ended March 31, 2007 through 2013 remain open and subject to examination in Austria. Tax filings in China for calendar years 2008 through 2012 will remain open and subject to examination.