9. INCOME TAXES

The provision for income taxes consists of the following:

Year ended December 31,

	2013			2012		2011
Current taxes:
Federal	$	2,724,597		$	686,968	$	-
State		25,491			12,182		3,525
Total current taxes		2,750,088			699,150		3,525
Deferred taxes:
Federal		(68,298	)		1,134,532		(1,219,190	)
State		3,023			340,372		(122,593	)
Total deferred taxes		(65,274	)		1,474,904		(1,341,783	)
Total provision for income taxes	$	2,684,814		$	2,174,054	$	(1,338,258	)

The effective income tax rate of the Company differs from the federal statutory tax rate of 34% due to the following items:

Year ended December 31,

	2013			2012			2011
Statutory rate		34.00	%		34.00	%		34.0	%
State income taxes, net of federal income tax benefit		0.21	%		0.16	%		7.1	%
Stock-based compensation		0.11	%		1.51	%		4.0	%
Change in effective state tax rate		0.02	%		6.59	%		-
Other, net		(0.66	)%		(0.08	)%		(5.9	)%
Increase (decrease) in valuation allowance		-			-			(64.6	)%
Effective tax rate (benefit)		33.68	%		42.18	%		(25.4	%)

The effective rate reconciliation includes the permanent differences and changes in valuation allowance for windfalls, stock-based compensation, and net operating loss.

Deferred income taxes reflect the 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. The components of deferred income tax assets and liabilities are as follows:

Year ended December 31,

	2013		2012		2011

Tax credit carry forward	$	-	$	-	$	1,027,633
Deferred revenues		71,062		132,514		293,297
Other		71,304		27,322		17,253
Options		1,365,409		1,413,214		1,687,780
Net operating loss carry forward		-		-		21,992
Net deferred tax assets before valuation allowance		1,507,776		1,573,050		3,047,955
Valuation allowance		-		-		-
Net deferred tax asset	$	1,507,776	$	1,573,050	$	3,047,955

Company considers all available information, including operating results, ongoing tax planning, and forecasts of future taxable income. Based on the results of our operations in 2011, the growth in the market for XIAFLEX, and the trend in actual and anticipated royalty income, we had determined that it was more likely than not that the benefit of our deferred tax assets would be realized. Consequently, in 2011, we eliminated the valuation allowance of $3.6 million.

Stock-based compensation, recorded in the Company's financial statements is non-deductible for tax purposes and increases the Company's effective tax rate. Deferred tax assets, including those associated with stock based compensation, are reviewed and adjusted for apportionment and potential tax rates changes in various jurisdictions. In 2012, our tax assets related to stock-based compensation decreased by $0.3 million, due to a reduction in our estimated state tax apportionment rate.

We recognized $0.6 million, $0.8 million and $0.7 million of tax deductible expenses from the exercise of non-qualified or a disqualified disposition of incentive stock options, in 2013, 2012 and 2011 respectively. The windfall tax benefits of $0.2 million, $0.3 million and $1.7 million realized upon exercise of stock-based awards were classified as additional paid in capital and recorded under cash flows from financing activities, in 2013, 2012 and 2011, respectively.

The provision for income taxes and corresponding taxes payable in 2013 was $2.7 million. We utilized tax assets of $0.1 million related to deferred licensing revenue and stock based compensation and a $17,000 research and development credit to reduce our taxes payable which was partially offset by an increase to our deferred taxes for employee based compensation. The amount of refundable federal income taxes as of December 31, 2013 is approximately $0.2 million.

In 2012, we used $1.0 million of our Orphan Drug tax credit to reduce our federal income tax payable. We recognized the tax effect of $0.8 million related to the exercise of nonqualified options in our financial statements, which lowered our taxes payable by $0.3 million, reduced our tax assets related to non-qualified stock options by $32,000 and increased additional paid in capital by $0.3 million. Additionally, we utilized tax assets from our federal and state net operating loss carryforwards of $16,000 and deferred licensing revenue of $0.1 million to reduce our taxes payable. Because our state net operating losses of $4.2 million exceeded our federal net operating losses of $47,000 we set up a valuation allowance of $0.3 million against our tax asset of our state net operating loss carryforwards.

As of December 31, 2013, the Company believes that there are no significant uncertain tax positions, and no amounts have been recorded for interest and penalties. The Company does not expect that it would be required to record a liability related to an uncertain tax position. The tax periods open to examination by the major taxing jurisdictions to which the Company is subject include fiscal years 2010 through 2012.