Income Taxes

Deferred income taxes reflect the net tax effects of 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 the Company’s deferred tax assets and liabilities are as follows:



	December 31,
	2013			2012
Deferred tax assets and liabilities:
Accrued liabilities	$	1,404,000		$	(125,000	)
Beneficial conversion feature on convertible financial instruments	—			(449,000		)
Intangible assets	1,021,000			1,117,000
Property and equipment	(507,000		)	89,000
R&D Credit Carryforward	1,369,000			1,407,356
Stock Compensation	2,151,000			213,000
Adjust accrued earn-out liability	—			567,947
Charitable Contributions	1,000			3,000
Patent fees	142,000			6,000
Net operating loss	14,663,000			15,539,000
Net deferred tax assets	$	20,244,000		$	18,368,303

Valuation allowance	(20,244,000		)	(18,368,303		)
	$	—		$	—

The reconciliation of the Federal statutory income tax rate of 34% to the effective rate is as follows:



	December 31,
	2013		2012
Federal statutory rate	34.00	%	34.00	%
State taxes, net of federal benefit	(2.48	)%	3.40	%
Permanent items & other	12.73	%	0.65	%
Valuation allowance	(46.73	)%	(38.05	)%
	(2.48	)%	—	%

Income taxes are based on estimates of the annual effective tax rate and evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.

Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefit that, based on available evidence, is not expected to be realized. The Company establishes a valuation allowance for deferred tax assets for which realization is not likely. At December 31, 2013, the Company had a valuation allowance of $20,244,000 recorded against the benefit of certain deferred tax assets. In assessing the recoverability of our deferred tax assets, we analyzed all evidence, both positive and negative. We considered, among other things, our deferred tax liabilities, our historical earnings and losses, projections of future income, and tax-planning strategies available to us in the relevant jurisdiction.

At December 31, 2013, we have income tax net operating loss ("NOL") carry forwards for federal and state purposes of $36,861,000 and $30,036,000, respectively. The Company has recorded a deferred tax asset for both federal and state income taxes of $12,533,000 and $2,130,000, respectively. If not utilized, the federal and state tax loss carry forwards will expire between 2027 and 2033.

The Company's net operating losses and credits are subject to annual limitations due to ownership change limitations provided by Internal Revenue Code Section 382. At this time the Company does not believe its carryforwards or credits will be materially impacted by such limitations.

In July 2006, the FASB issued Interpretation 48 (codified primarily in ASC 740), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with Statement 109 (codified primarily in ASC 740). Interpretation 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of Interpretation 48 and in subsequent periods. As a result of the implementation, the Company has analyzed its tax positions and determined that no reserve is necessary at this time.

The Company is subject to taxation in the US and various state jurisdictions. As of December 31, 2013, the Company’s tax years for 2010, 2011 and 2012 are subject to examination by the tax authorities. As of December 31, 2013, the Company is generally no longer subject to US federal, state, or local examinations by tax authorities for years before 2010. Tax year 2009 was open as of December 31, 2012.