Note 8 - INCOME TAXES

Net (loss) income before income taxes consists of the following (in thousands):



	For the Years Ended
	December 31,
	2013		2012
Domestic	$	(5,183)	$	1,637
Total	$	(5,183)	$	1,637

The federal and state income tax (benefit) provision is summarized as follows (in thousands):



	For the Years Ended
	December 31,
	2013		2012
Current:	$		$
Federal		1		74
State		2		27
Total current tax expense		3		101
Deferred:
Federal		8,803		(709)
State		78		(7)
Total deferred tax expense (benefit)		8,881		(716)
Total tax expense (benefit)	$	8,884	$	(615)

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

The tax effects of significant items comprising the Company’s deferred taxes as of December 31 are as follows (numbers are in thousands):



	For the Years Ended
	December 31,
	2013		2012
Deferred tax assets:
Federal and state net operating loss carryforwards	$	36,284	$	34,868
Research and development tax credit carryforwards		1,979		1,571
Stock based compensation		3,665		2,995
Other provision and expenses not currently deductible		755		659
Total deferred tax assets		42,683		40,093
Deferred tax liabilities:
Depreciation and amortization		(374)		(7)
Prepaid expenses		(191)		(162)
Total deferred liabilities		(565)		(169)
Less valuation allowance		(42,118)		(31,043)
Net deferred tax asset	$	—	$	8,881

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that the change occurs. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. Changes in circumstances, assumptions and clarification of uncertain tax regimes may require changes to any valuation allowances associated with the Company’s deferred tax assets.

Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Through December 31, 2009, the Company’s net deferred tax assets were fully reserved due to uncertainty of realization through future earnings. In 2010, the Company determined that based on all available evidence, both positive and negative, and based on the weight of the available evidence, including the Company’s cumulative taxable income over the past three years and expected profitability in 2011 through 2013 that certain of its deferred tax assets were more likely than not realizable through future earnings. Accordingly, the Company reduced its valuation allowance by $9.1 million and recorded a corresponding tax benefit of $9.1 million.

In 2011, the Company determined that it is more likely than not that $8.2 million of its deferred tax asset will be realized and no additional valuation allowance was released. In 2012, the Company determined that based on all available evidence, both positive and negative, and based on the weight of the available evidence, including the Company’s continued profitability and projected cumulative taxable income through 2017 that certain of its deferred tax assets were more likely than not realizable through future earnings. The Company recorded a $0.7 million reduction of its deferred tax asset valuation allowance which increased its net deferred tax asset to $8.9 million and recorded a corresponding income tax benefit of $0.7 million.

In 2013, the Company determined that based on all available evidence, both positive and negative, and based on the weight of the available evidence, including the Company’s recent operating loss in 2013 and a projected cumulative loss through 2014, it was more likely than not that none of its deferred tax assets will be realized. Therefore, it recorded a full valuation allowance and recorded income tax expense of $8.9 million.

As of December 31, 2013 and 2012, the Company had net deferred tax assets before its valuation allowance of approximately of $42.1 and $39.9 million, respectively, primarily resulting from the future tax benefit of net operating loss carryforwards. The amount of the valuation allowance for deferred tax assets associated with excess tax deduction from stock-based compensation arrangement that is allocated to contributed capital if the future tax benefits are subsequently recognized is $1.2 million at December 31, 2013.

During the year ended December 31, 2013, the Company did not utilize its prior years’ net operating loss carryforwards. As of December 31, 2013, eMagin has federal and state net operating loss carryforwards of approximately $109.7 million and $2.4 million, respectively. The federal research and development tax credit carryforwards are approximately $2 million. The federal net operating losses and tax credit carryforwards will expire as follows:



		Net		Research and
		Operating		Development
		Losses		Tax Credits
	(in millions)
2019-2021	$	18.9	$	0.8
2022-2025		40.2		—
2026-2034		50.6		1.2
	$	109.7	$	2.0

The utilization of net operating losses is subject to a limitation due to the change of ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating losses before their utilization. The Company has done an analysis regarding prior year ownership changes, and it has been determined that the Section 382 limitation on the utilization of net operating losses will currently not materially affect the Company's ability to utilize its net operating losses.

The difference between the statutory federal income tax rate on the Company's pre-tax loss and the Company's effective income tax rate is summarized as follows:



	For the Years Ended
	December 31,
	2013			2012
U.S. Federal income tax expense at federal statutory rate		34	%		34	%
Change in valuation allowance		(214)			(81)
Change in effective state tax rate		1			2
Credits		8			7
Other, net		—			1
Effective tax rate		(171)	%		(37)	%

The Company did not have unrecognized tax benefits at December 31, 2013 and 2012. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2013 and 2012, the Company recognized no interest and penalties.

The Company files income tax returns in the U.S. federal jurisdiction, California, Florida, New York and Virginia. Due to the Company's operating losses, all tax years remain open to examination by major taxing jurisdictions to which the Company is subject.