Note 11. Income Taxes

A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows (in thousands):

	Year Ended December 31,

	2013			2012			2011
Benefit at U.S. federal statutory rate	$	(28,997	)	$	(15,451	)	$	(65,289	)
Unbenefitted net operating losses and tax credits		18,215			6,492			57,102
Non-deductible amortization of debt discount		6,645			8,347			7,612
Non-deductible interest expense		747			376			340
Non-deductible debt exchange expense and loss on repurchase of senior notes		7,985			—			—
Deferred tax impact of law change		(5,549	)		—			—
Other		1,253			410			235


Provision for income taxes	$	299		$	174		$	—

The provision for income taxes for the years ended December 31, 2013 and 2012 were for state income taxes.

Significant components of our deferred tax assets and liabilities are as follows (in thousands):

	December 31,

	2013			2012
Deferred tax assets:
Federal and state net operating loss carry forwards	$	513,000		$	493,000
Federal and state research credits		122,000			96,000
Capitalized research and development		8,000			14,000
Deferred revenue and accruals		21,000			44,000
Non-cash compensation		23,000			22,000
Deferred financing obligation		8,000			—
Other		9,000			8,000


Total gross deferred tax assets		704,000			677,000
Less valuation allowance for deferred tax assets		(627,000	)		(677,000	)


Net deferred tax assets	$	77,000		$	—




Deferred tax liabilities:
Property and equipment		(8,000	)		—
Equity component of 2018 Notes and 2020 Notes	$	(69,000	)	$	—


Total gross deferred tax liabilities		(77,000	)		—




Net deferred income taxes	$	—		$	—

The valuation allowance for deferred tax assets decreased by approximately $50.0 million during the year ended December 31, 2013, decreased by approximately $16.0 million during the year ended December 31, 2012, and increased by approximately $72.0 million during the year ended December 31, 2011. Management believes the uncertainty regarding the realization of net deferred tax assets requires a full valuation allowance.

As of December 31, 2013, we had federal and state net operating loss carryforwards (NOLs) of approximately $1.5 billion. The federal and state NOLs will expire at various dates beginning in 2020 through 2033, if not utilized. Our ability to utilize these NOLs may be limited under Internal Revenue Code Section 382 ("Section 382"). Section 382 imposes annual limitations on the utilization of NOL carryfowards and other tax attributes upon an ownership change. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in our stock by more than 50 percentage points over a testing period (generally three years). These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

We completed a Section 382 analysis through the year ended December 31, 2011. Based on this analysis, our NOLs and other tax attributes accumulated through 2011 should not be limited under Section 382. We have not yet updated our Section 382 analysis through 2013. Our future utilization of all of our NOLs and other tax attributes is dependent upon our ability to generate sufficient income during the carryforward periods. When tax attributes are used, NOLs are used before tax credits and this will likely result in expiration of certain tax credits.

We have no unrecognized tax benefits as of December 31, 2013 and 2012, and we provide a full valuation allowance on the net deferred tax asset recognized in the consolidated financial statements.

We recognize interest and penalties related to uncertain tax positions, if any, in income tax expense. As of December 31, 2013 and 2012, we did not accrue any interest related to uncertain tax positions. Due to NOL and tax credit carry forwards, all income tax returns filed by us remain subject to examination by the taxing jurisdictions.

In connection with the adoption of stock-based compensation guidance in 2006, we elected to follow the with-and-without approach to determine the sequence in which deductions and NOL carryforwards are utilized. Accordingly, there have only be de minimis excess tax benefits related to stock option exercises in any year as a result of the utilization of NOL carryforwards to offset any taxable income. The table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2013 and 2012 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for book purposes. Additional paid in capital will be increased by approximately $131.2 million if and when such deferred tax assets are ultimately realized.

At December 31, 2013, we also had federal and state research and development tax credit carryforwards of approximately $121.7 million that will expire at various dates, beginning in 2018 through 2033, if not utilized. The American Tax Relief Act of 2012, enacted January 2, 2013, retroactively reinstated the research and development credit for 2012 and 2013. Accordingly, in 2013 we recorded credits of approximately $5.5 million related to 2012 as a result of the retroactive reinstatement.