Income Taxes

The Company only recognizes tax benefits if it is more-likely-than-not to be sustained upon audit by the relevant taxing authority based upon its technical merits. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The balance of unrecognized tax benefits at December 31, 2014 of $1,019,000 are tax benefits that, if we recognize them, would not impact our effective tax rate as long as they remain subject to a full valuation allowance.

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):



	December 31,
	2014		2013
Beginning balance of unrecognized tax benefits	$	899	$	714
Gross increases based on tax positions related to current year	120		185
Gross increases based on tax positions related to prior year	—		—
Settlements with taxing authorities	—		—
Expiration of statute of limitations	—		—
Ending balance of unrecognized tax benefits	$	1,019	$	899

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrued interest or penalties on the consolidated balance sheets at December 31, 2014 and 2013 and has recognized no interest and/or penalties in the consolidated statements of operations and comprehensive loss through the year ended December 31, 2014.

The Company is subject to taxation in U.S. federal, state, and foreign jurisdictions. The Company’s tax years for 2008 and forward can be subject to examination by the United States and state tax authorities due to the carry forward of net operating losses.

At December 31, 2014, the Company had available federal, California, and foreign income tax net operating loss carryforwards of approximately $211,200,000 , $209,100,000 and $1,969,000, respectively. The federal tax loss carryforwards will begin expiring in 2026 unless previously utilized, and the state tax loss carryforwards will begin expiring in 2015 unless previously utilized. In addition, the Company has federal and California research and development income tax credit carryforwards of $2,200,000 and $2,700,000, respectively. The federal research and development income tax credit carryforwards will begin to expire in 2026 unless previously utilized. The California research and development income tax credit carryforwards will carry forward indefinitely until utilized.

The Company has completed an analysis under Internal Revenue Service Code (IRC) Sections 382 and 383 to determine if the Company’s net operating loss carryforwards and research and development credits are limited due to a change in ownership. The Company has determined that as of December 31, 2014 the Company had three ownership changes. The first ownership change occurred in August 2006 upon the issuance of the Series A-1 convertible preferred. As a result of this ownership change, the Company has reduced its net operating loss carryforwards by $1,900,000 and research and development income tax credits by $8,000. The Company had a second ownership change as defined by IRC Sections 382 and 383, which occurred in September 2011 upon the issuance of common stock in its follow-on offering. As a result of the second ownership change, the Company has reduced its federal net operating loss carryforwards as of December 31, 2011 by $121,100,000 and research and development income tax credits as of December 31, 2011 by $3,017,000. The Company also reduced its California net operating loss carryforwards as of December 31, 2011 by $53,329,000 as a result of the second ownership change. The Company had a third ownership change as defined by IRC Sections 382 and 383, which occurred in January 2014. There was no forfeiture in federal and California net operating loss carryforwards or research and development income tax credits as a result of the third ownership change. Pursuant to IRC Section 382 and 383, use of the Company’s net operating loss and research and development income tax credit carryforwards may be limited in the event of a future cumulative change in ownership of more than 50% within a three-year period.

The reconciliation of income tax computed at the Federal statutory tax rate to the expense for income taxes is as follows (in thousands):



	December 31,
	2014			2013			2012
Tax at statutory rate	$	2,941		$	(27,491	)	$	(16,109	)
State taxes, net of federal benefit	(489		)	(1,821		)	(1,580		)
Change in valuation allowance	7,013			22,602			21,990
Permanent interest disallowed	(8,608		)	7,197			(4,466		)
Other permanent differences	1,226			1,279			1,360
Research and development tax credits	(1,387		)	(744		)	(2,352		)
State tax rate benefit	(503		)	(822		)	842
Other	(109		)	(200		)	320
	$	84		$	—		$	5

Significant components of the Company’s deferred tax assets as of December 31, 2014 and 2013 are listed below. A valuation allowance of $110,338,000 and $102,949,000 for the years ended December 31, 2014 and 2013, respectively, has been established to offset the deferred tax assets as realization of such assets is uncertain. The components of the deferred tax assets are as follows (in thousands):



	December 31,
	2014			2013
Deferred tax assets:
Net operating losses	$	82,054		$	80,388
Capitalized research and development	7,176			8,172
Accrued expenses	2,030			3,263
Research and development credits	3,395			2,010
Accrued product returns	1,772			2,029
Inventory reserve and UNICAP	2,956			660
Amortization	2,556			2,861
Deferred revenue	4,446			—
Other, net	5,128			4,736
Total deferred tax assets	111,513			104,119
Less valuation allowance	(110,338		)	(102,949		)
Net deferred tax assets	1,175			1,170

Deferred tax liabilities:
Depreciation	(1,175		)	(1,170		)
IPR&D	(20,500		)	—
Total deferred tax liabilities	(21,675		)	(1,170		)
Net deferred tax liability	$	(20,500	)	$	—

The Company incurred $84,000 in income tax expense for the year ended December 31, 2014 related to taxable income generated by its wholly-owned subsidiary Zogenix Europe, and did not incur any income tax expense for the year ended December 31, 2013.