15. Income taxes

There is no provision for income taxes because the Company has incurred operating losses since inception. At December 31, 2013, the Company has concluded that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to its history of losses. Accordingly, the net deferred tax assets have been fully reserved. The provision for income taxes consists of the following (in thousands):


	Year Ended December 31,
	2011			2012			2013
Current
U.S. federal	$	—		$	—		$	—
U.S. state		—			—			—
Non-U.S.		—			—			—

Total current		—			—			—

Deferred
U.S. federal		48,643			51,540			59,379
U.S. state		8,582			9,199			7,470
Non-U.S.		—			—			—
Valuation Allowance		(57,225	)		(60,739	)		(66,849	)

Total deferred		—			—			—

Total	$	—		$	—		$	—

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax asset as of December 31, 2012 and 2013 are approximately as follows (in thousands):


	December 31,
	2012			2013
Deferred tax assets:
Net operating loss carryforwards	$	609,471		$	653,896
Research and development credits		65,315			70,091
Capitalized research		31,490			30,421
Milestone Rights		—			6,608
Accrued expenses		2,922			3,578
Non-qualified stock option expense		30,928			41,219
Capitalized patent costs		6,891			7,811
Other		—			837
Depreciation		3,134			2,539

Total net deferred tax assets		750,151			817,000
Valuation allowance		(750,151	)		(817,000	)

Net deferred tax assets	$	—		$	—

The Company’s effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2011, 2012 and 2013:


	December 31,
	2011			2012			2013
Federal tax benefit rate		35.0	%		35.0	%		35.0	%
State tax benefit, net of federal benefit		—			—			—
Permanent items		—			—			—
Intercompany transfer of intellectual property		(5.0	)		(4.0	)		(4.3	)
Valuation allowance		(30.0	)		(31.0	)		(30.7	)

Effective income tax rate		0.0	%		0.0	%		0.0	%

As required by ASC 740 Income Taxes (“ASC 740”), management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to net losses since inception. Accordingly, the net deferred tax assets have been fully reserved. Management reevaluates the positive and negative evidence on an annual basis. During the years ended December 31, 2011, 2012 and 2013, the change in the valuation allowance was $57.2 million, $60.7 million and $66.8 million, respectively, for income taxes.

At December 31, 2013, the Company had federal and state net operating loss carryforwards of approximately $1.7 billion and $1.2 billion available, respectively, to reduce future taxable income and which will expire at various dates beginning in 2018 and 2014, respectively. As a result of the Company’s initial public offering, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in August 2004. As a result, federal net operating loss and credit carry forwards of approximately $216.0 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the Section 382 limitation for those years. The federal net operating losses generated subsequent to the Company’s initial public offering in August 2004 are currently not subject to any such limitation as there have been no ownership changes since August 2004 within the meaning of Internal Revenue Code Section 382. At December 31, 2013, the Company had research and development credits of $45 million and $38 million for federal and state purposes, respectively. The federal credits begin to expire in 2024, and the state credits may be carried forward indefinitely.

A portion of the net operating loss carryforwards include amounts related to stock-based payment awards. Any excess tax benefits from stock-based compensation are only recognized for financial reporting purposes when income taxes payable is reduced, with a corresponding increase to additional paid-in capital.

The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. Tax years since 1998 remain subject to examination by the major tax jurisdictions in which the Company is subject to tax.