Note 13—Income Taxes

For the years ended December 31, 2015 and 2014, 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 2015 or 2014 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, 2015 and 2014, the expected income tax effect of the Company’s deferred tax assets (liabilities) consisted of the following:

	2015		2014
Deferred tax asset:
Tax effect of:
Net operating loss carryforwards	$	29,122,000	$	26,754,000
Accrued expenses		87,000		105,000
Amortization of definite lived intangible assets		10,000		12,000
Non-qualified stock option compensation		315,000		113,000
Depreciation		72,000		97,000
Deferred revenue		880,000		930,000
Other		139,000		146,000
Patents		(23,000)		(77,000)
State net operating loss carryforwards, net of federal tax benefit		579,000		214,000
Research tax credit carryforwards		2,274,000		2,169,000
Total deferred tax assets		33,455,000		30,463,000
Valuation allowance		(33,455,000)		(30,463,000)
Net deferred tax assets	$	-	$	-

As of December 31, 2015, the Company had gross net operating loss (NOL) and research tax credit carryforwards of approximately $88.2 million and $1.6 million, respectively, for federal income tax purposes, expiring in varying amounts through the year 2035. Of the $88.2 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, 2015, the Company had gross NOL and research tax credit carryforwards of approximately $11.0 million and $1.0 million for state income tax purposes, expiring in varying amounts through the year 2035.

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. 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 Company is subject to taxation in the United States and the Commonwealth of Massachusetts. As of December 31, 2015, tax years for 2012, 2013 and 2014 are subject to examination by the tax authorities. As of December 31, 2015 we are no longer subject to U.S. federal and state examinations by tax authorities for years before 2012.

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

	2015			2014
Tax at statutory rate		(34.0)	%		(34.0)	%
State taxes, net of federal benefit		0.0			0.0
Research and development credit		(1.3)			(1.4)
Share based payment expense		1.6			1.8
Other		0.7			1.5
Removal of deferred tax asset on federal net operating losses		0.0			0.0
Establishment of deferred tax asset on state net operating losses and state deferred taxes, net of federal income tax benefits		(4.9)			(3.8)
Change in valuation allowance		37.9			36.0
Effective tax rate		0.0	%		0.0	%