NOTE 13 – INCOME TAXES

Provision for Income Taxes

The reconciliation between our provision for income taxes and the amounts computed by multiplying our loss before taxes by the U.S. statutory tax rate is as follows (in thousands):

	December 31,
	2016		2015
Benefit at U.S. statutory 34% tax rate	$	(2,512)	$	(1,696)
State taxes (benefit), net of federal effect		49		41
Research and development tax credits		-		-
Share-based compensation		159		184
Other		2		11
Change in valuation allowance		2,302		1,460
Provision for income taxes	$	-	$	-

Deferred Tax Assets and Valuation Allowance

Deferred tax assets reflect the tax effects of net operating losses (“NOLs”), tax credit carryovers, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The most significant item of our deferred tax assets is derived from our Federal NOLs. We have approximately $47.2 million Federal income tax benefits at December 31, 2016 derived from $138.8 million Federal NOLs at the U.S. statutory tax rate of 34% and $2.1 million State NOLs. These NOLs are available to offset future taxable income, some of which already have limitations for future use as prescribed under IRC Section 382. We have updated our previously conducted Section 382 study through December 31, 2016 which provides no further limitations for future use of the NOLs. Our Federal and State NOLs will expire in varying amounts between 2017 and 2036 if not used, and those expirations will cause fluctuations in our valuation allowances. The net change in the valuation allowance in 2016 and 2015 was approximately $5.6 million and $0.6 million, respectively.

As of December 31, 2016 we had federal research and development tax credits of approximately $1.2 million, which expire in the years 2024 through 2034. We also had approximately $0.2 million of Indiana state research and development tax credits, which will expire in 2017.

The components of our deferred tax assets are as follows:

	December 31,
	2016		2015
	(in thousands)
Deferred tax assets:
Estimated future value of NOLs
- Federal	$	47,192	$	52,772
- State		2,135		2,050
Research and development tax credits		1,320		1,394
Share-based compensation		57		38
Other, net		332		368
Total deferred taxes		51,036		56,622
Valuation allowance		(51,036)		(56,622)
Net deferred tax assets	$	-	$	-

Realization of deferred tax assets is dependent upon future earnings, if any, and the timing and amount of which may be uncertain. Valuation allowances are placed on deferred tax assets when uncertainty exists on their near term utilization. We make periodic reviews of our valuation allowances and fluctuations can occur. Those fluctuations may be reflected as income tax expenses or benefits in the period they occur. We continue to maintain full valuation allowance against all of our deferred tax assets at December 31, 2016 due to uncertainties with respect to future utilization of net operating loss carryforwards. If in the future it is determined that amounts of our deferred tax assets would likely be realized, the valuation allowance would be reduced in the period in which such determination is made and a benefit from income taxes in such period would be recognized.

Uncertainty in Income Taxes

We adopted FASB’s statement regarding accounting for uncertainty in income taxes which defined the threshold for recognizing the benefits of tax-return positions in the consolidated financial statements as “more-likely-than-not” to be sustained by the taxing authorities. Our adoption of the standard did not result in establishing a contingent tax liability reserve or a corresponding charge to retained earnings. At each of December 31, 2016 and 2015, we had no liability for income tax associated with uncertain tax positions. If in the future we establish a contingent tax liability reserve related to uncertain tax positions, our practice will be to recognize the interest in interest expense and the penalties in other non-operating expense.

The Company files federal and state income tax returns and in the normal course of business the Company is subject to examination by these taxing authorities. As of December 31, 2016, the Company’s tax years 2013, 2014 and 2015 are subject to examination by the taxing authorities. With few exceptions, we believe the Company is no longer subject to U.S. Federal, State and local examinations by taxing authorities for years before 2013.