Income Taxes

We have a history of losses and therefore have made no provision for income taxes. Deferred income taxes reflect the tax effect of net operating loss and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of deferred tax assets are as follows:



	December 31,
	2013			2012
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	68,942		$	59,124
Deferred rent	2,770			1,579
Stock-based compensation	3,537			2,183
Research and development tax credits	5,707			3,775
Other	1,866			1,614
Total	82,822			68,275
Less valuation allowance	(82,822		)	(68,275		)
Net deferred tax assets	$	—		$	—

As of December 31, 2013 and 2012, we had net operating loss carryforwards of approximately $205.9 million and $177.0 million, respectively, and research and development tax credit carryforwards of approximately $5.7 million and $3.8 million, respectively. Approximately $3.2 million of our net operating loss carryforwards relate to tax deductible stock-based compensation in excess of amounts recognized for financial statement purposes. To the extent that net operating loss carryforwards, if realized, relate to stock-based compensation, the resulting tax benefits will be recorded to shareholders’ equity, rather than to the results of operations.

In certain circumstances, due to ownership changes, our net operating loss and tax credit carryforwards may be subject to limitations under Section 382 of the Internal Revenue Code. Unless previously utilized, our net operating loss and research and development tax credit carryforwards expire between 2019 and 2033.

We have established a 100% valuation allowance due to the uncertainty of our ability to generate sufficient taxable income to realize the deferred tax assets. Our valuation allowance increased $14.5 million, $13.6 million and $9.5 million in 2013, 2012 and 2011, respectively, primarily due to net operating losses incurred during these periods.

Deferred tax assets at December 31, 2012 did not include $1.1 million of research and development credits generated for the year ended December 31, 2012. The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013, which retroactively extended the research and development credit back to January 1, 2012. Therefore, the 2012 research and development credits of $1.1 million are included in 2013.

A reconciliation of the Federal statutory tax rate of 34% to our effective income tax rate follows:



	Year ended December 31,
	2013	2012	2011
Statutory tax rate	(34)%	(34)%	(34)%
Permanent difference	3%	2%	1%
Change in valuation allowance	36%	35%	33%
Research and development credit	(5)%	—%	—%
Other	—%	(3)%	—%
Effective tax rate	—%	—%	—%

We file income tax returns in the United States, which typically provides for a three-year statute of limitations on assessments. However, because of net operating loss carryforwards, substantially all of our tax years remain open to federal tax examination.

The guidance for accounting for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. As a result of the implementation of this guidance, we identified certain immaterial adjustments to our research and development tax credit, which was accounted for as a reduction to the deferred tax assets. There have been no changes in unrecognized tax benefits for the years ended December 31, 2013, 2012 and 2011. Further, there were no unrecognized tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial position, results of operations or cash flows.

We recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.