Note 13—Income Taxes

For the years ended December 31, 2014 and 2013, the Company recorded no tax provision or benefit. While the Company has incurred losses from operations it has not recorded an income tax benefit for 2014 or 2013 as it has recorded a valuation allowance against net operating losses and other net deferred tax assets due to uncertainties related to the ability of these tax assets to be realized.

Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted federal and state tax rates in effect for the year in which the differences are expected to reverse. As of December 31, 2014 and 2013, the expected income tax effect of the Company’s deferred tax assets (liabilities) consisted of the following:

	2014		2013
Deferred tax asset:
Tax effect of:
Net operating loss carryforwards	$	26,754,000	$	25,504,000
Accrued expenses		105,000		49,000
Amortization of definite lived intangible assets		12,000		15,000
Non-qualified stock option compensation		113,000		69,000
Depreciation		97,000		123,000
Other		1,076,000		297,000
Patents		(77,000)		(114,000)
State net operating loss carryforwards, net of federal tax benefit		214,000		19,000
Research tax credit carryforwards		2,169,000		2,223,000
Total deferred tax assets		30,463,000		28,185,000
Valuation allowance		(30,463,000)		(28,185,000)
Net deferred tax assets	$	-	$	-

As of December 31, 2014, the Company had gross net operating loss (NOL) and research tax credit carryforwards of approximately $81.2 million and $1.6 million, respectively, for federal income tax purposes, expiring in varying amounts through the year 2034. Of the $81.2 million NOL carryforward, $2.5 million relates to stock-based compensation and has not been reflected in the deferred taxes and when the benefit of these losses, if any, is realized, the Company will credit additional paid in capital.

As of December 31, 2014, the Company had gross NOL and research tax credit carryforwards of approximately $4.1 million and $0.9 million for state income tax purposes, expiring in varying amounts through the year 2034.

The Company’s ability to use its NOL and tax credit carryforwards to reduce future taxes is subject to the restrictions provided by Section 382 of the Internal Revenue Code of 1986. These restrictions provide for limitations on the Company’s utilization of its NOL and tax credit carryforwards following a greater than 50% ownership change during the prescribed testing period. Beginning on March 5, 2003, the Company had such a change. As a result, all of the Company’s NOL carryforwards as of that date are limited as to utilization. The annual limitation may result in the expiration of certain of the carryforwards prior to utilization. In addition, the Company’s equity offerings, including those in 2013 and 2014, may have resulted in qualifying changes in ownership. A formal study, which the Company has not undertaken, is required to determine applicability of restrictions, and might indicate that the Company’s NOL carryforwards are subject to additional limitations on utilization.

The benefit for income taxes differs from the federal statutory rate due to the following:

	2014		2013
Tax at statutory rate	(34.0)	%	(34.0)	%
State taxes, net of federal benefit	0.0		0.0
Research and development credit	(1.4)		(1.7)
Share based payment expense	1.8		0.7
Other	1.5		3.0
Removal of deferred tax asset on federal net operating losses	0.0		64.1
Establishment of deferred tax asset on state net operating losses and state deferred taxes, net of federal income tax benefits	(3.8)		6.4
Change in valuation allowance	36.0		(38.6)
Effective tax rate	0.0	%	0.0	%