Note 12 — Income Taxes

Loss before (benefit) provision for income taxes includes the following components (in thousands):


	Year Ended December 31,
	2014			2013			2012
Domestic	$	(56,414	)	$	(161,068	)	$	(174,258	)
Foreign		1,986			1,300			2,809

Loss before (benefit) provision for income taxes	$	(54,428	)	$	(159,768	)	$	(171,449	)

Provision for Income Taxes

The (benefit) provision for income taxes consists of the following (in thousands):


	Year Ended December 31,
	2014			2013			2012
Current:
Federal	$	—		$	—		$	(137	)
State		1			1			1
Foreign		(482	)		1,838			1,029

Total Current		(481	)		1,839			893

Deferred:
Federal		—			422			(422	)
State		—			49			(49	)
Foreign		(31	)		(65	)		(16	)

Total Deferred		(31	)		406			(487	)

(Benefit) provision for income taxes	$	(512	)	$	2,245		$	406

The foreign benefit provision in the year ended December 31, 2014 is due to the reduction in taxes related to a favorable determination received from India proceedings.

Income tax provision related to continuing operations differs from the amount computed by applying the statutory income tax rate of 35% to pretax loss as follows (in thousands):


	Year Ended December 31,
	2014			2013			2012
U.S. federal provision (benefit)
At statutory rate	$	(19,050	)	$	(55,919	)	$	(60,007	)
State taxes		1			50			(48	)
Change in valuation allowance		11,831			55,042			47,349
Non-cash interest expense on liability related to sale of future royalties		7,311			7,808			6,320
Stock-based compensation		2,832			271			236
Foreign tax inclusion		—			—			6,510
Foreign tax differential		(17	)		(20	)		(227	)
Research credits		(2,933	)		(6,273	)		(591	)
Other		(487	)		1,286			864

(Benefit) provision for income taxes	$	(512	)	$	2,245		$	406

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands):


	December 31,
	2014			2013
Deferred tax assets:
Net operating loss carryforwards	$	423,776		$	391,385
Research and other credits		66,666			61,707
Deferred revenue		29,758			35,588
Stock-based compensation		21,948			25,962
Sale of future royalties		20,153			28,057
Capitalized research expenses		14,795			17,687
Reserves and accruals		8,288			14,685
Property, plant and equipment		8,264			8,580
Other		2,218			2,539

Deferred tax assets before valuation allowance		595,866			586,190
Valuation allowance for deferred tax assets		(595,690	)		(586,040	)

Total deferred tax assets		176			150

Total deferred tax liabilities		—			—

Net deferred tax assets	$	176		$	150

Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of our lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $9.7 million and $51.8 million during the years ended December 31, 2014 and 2013, respectively. The valuation allowance includes approximately $35.6 million of income tax benefit at both December 31, 2014 and December 31, 2013 related to stock-based compensation and exercises prior to the implementation of the accounting guidance for stock-based compensation that will be credited to additional paid in capital when realized.

Undistributed earnings of our foreign subsidiary in India are considered to be permanently reinvested and accordingly, no deferred U.S. income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to U.S. income tax. As of December 31, 2014, U.S. income taxes have not been provided on a cumulative total of $3.9 million of such earnings. Any incremental tax liability would be insignificant due to foreign tax credits that would be realized upon distribution.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2014, we had a net operating loss carryforward for federal income tax purposes of approximately $1,131.8 million, portions of which will begin to expire in 2018. As of December 31, 2014, we had a total state net operating loss carryforward of approximately $709.2 million, of which approximately $124.6 million does not meet the more likely than not standard and has not been included in our deferred tax assets. Our state operating loss carryforwards will begin to expire in 2015. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions.

We have federal research credits of approximately $40.0 million, which will begin to expire in 2019 and state research credits of approximately $22.6 million which have no expiration date. We have federal orphan drug credits of $17.7 million which will begin to expire in 2026. These tax credits are subject to the same limitations discussed above.

Unrecognized tax benefits

We have incurred net operating losses since inception. Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for income taxes in the consolidated statements of operations. If we are eventually able to recognize our uncertain positions, our effective tax rate may be reduced. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to our uncertain tax positions would result in an adjustment of our net operating loss or tax credit carry forwards rather than resulting in a cash outlay.

We file income tax returns in the U.S., California, Alabama, and India. Because of net operating losses and research credit carryovers, substantially all of our domestic tax years remain open and subject to examination. We are currently under examination in India for the fiscal years ending 2009 through 2014.

We have the following activity relating to unrecognized tax benefits (in thousands):


	December 31,
	2014			2013		2012
Beginning balance	$	16,363		$	14,067	$	13,576
Tax positions related to current year
Additions:
Federal		502			477		289
State		6,141			381		302
Reductions		—			—		—
Tax positions related to prior year
Additions:
Federal		—			636		37
State		5,258			—		—
Foreign		—			802		—
Reductions — foreign		(742	)		—		—
Settlements		—			—		—
Lapses in statute of limitations		—			—		(137	)

Ending balance	$	27,522		$	16,363	$	14,067

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve months. During the years ended December 31, 2014, 2013 and 2012, no significant interest or penalties were recognized relating to unrecognized tax benefits.