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 (in thousands):



	December 31,
	2014			2013
Deferred tax assets and liabilities:
Accruals and prepaids	$	3,563		$	1,404
Intangible assets	619			1,163
Property and equipment	(770		)	(507		)
R&D and other tax credits	2,086			1,369
Stock compensation	4,163			2,151
Charitable contributions	1			1
Federal and state basis difference	114			—
Net operating loss	6,382			14,663
Net deferred tax assets	$	16,158		$	20,244

Valuation allowance	(16,158		)	(20,244		)
	$	—		$	—

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



	December 31,
	2014		2013
Federal statutory rate	34.00	%	34.00	%
State taxes, net of federal benefit	9.58	%	(2.48	)%
Non deductible compensation	5.59	%	—	%
Meals & entertainment	5.55	%	—	%
Stock based compensation - ISO	21.73	%	—	%
Other	(5.92	)%	12.73	%
Valuation allowance	(58.73	)%	(46.73	)%
	11.80	%	(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, 2014, the Company had a valuation allowance of approximately $16,158,000 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. The Company 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.

As a result of anticipated profitability for the year and positive trends in the foreseeable future, the Company may release all or a portion of this valuation allowance by the end of 2015. However, the exact timing and amount of the valuation allowance released are subject to change based on the level of profitability that the Company is able to actually achieve for the year and its visibility into future period results. The potential release of this valuation allowance during 2015 would have a material impact on the Company's recorded tax expense in the period of reversal. The Company will release this valuation allowance when management determines that it is more likely than not that its deferred tax asset will be realized.

At December 31, 2014, the Company has income tax net operating loss ("NOL") carry forwards for federal and state purposes of approximately $15,323,000 and approximately $21,196,000, respectively. The Company has recorded a deferred tax asset for both federal and state income taxes of approximately $5,210,000 and approximately $1,172,000, respectively. If not utilized, the federal and state tax loss carry forwards will expire between 2026 and 2031.

As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2014, and December 31, 2013, that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by approximately $5,676,000 if and when such deferred tax assets are ultimately realized. The Company uses ASC 740 ordering when determining when excess tax benefits have been realized.

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. The Company has performed an analysis and determined that the limitation exceeds the utilization of NOLs in the current year and does not anticipate much limitation going forward.

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, 2014, the Company’s tax years for 2011, 2012 and 2013 are subject to examination by the tax authorities. As of December 31, 2014, the Company is generally no longer subject to US federal, state, or local examinations by tax authorities for years before 2011.