5. Income Taxes

We use the assets and liability method to account for income taxes in accordance with ASC 740‑10, Income taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. At each balance sheet date, we evaluate the available evidence about future taxable income and other possible source of realization of deferred income tax assets, and record a valuation allowance that reduces the deferred income tax assets to an amount that represents management’s best estimate of the amount of such deferred income tax assets that more likely than not will be realized. We did not record a liability or an asset related to an uncertain tax position for the years ended December 31, 2014 and 2013.

Our effective tax rate differs from the statutory federal income tax rate, primarily as a result of the operating loss and tax credits generated. For the years ended December 31, 2014, 2013 and 2012 there was no current provision for federal or state income taxes due to taxable losses incurred in each of the years.

A reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows (in thousands):


	Year Ended
	December 31,
	2014		2013		2012
Federal statutory income tax rate	$	(5,583)	$	(20,488)	$	(2,922)
Loss on settlement of notes		—		18,884		—
Non-deductible research and development credit		435		—		336
Stock based compensation		478		—		—
Other		2		4		12
Net change in valuation allowance		4,668		1,600		2,574
Net effective tax rate	$	—	$	—	$	—

The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at December 31, 2014 and 2013 is presented below (in thousands):


	2014		2013
Deferred income tax assets
Net operating loss carryforwards	$	47,401	$	58,286
Research credits		12,789		24,276
Depreciation		790		849
Stock-based compensation		—		52
Accrued compensation		373		137
Deferred revenue		1,836		3,899
Gross deferred income tax assets		63,189		87,499
Valuation allowance		(59,602)		(84,045)
Net deferred income tax assets		3,587		3,454
Deferred income tax liabilities
Patent costs		(3,199)		(2,929)
Licensing costs		(317)		(406)
Capitalized legal costs		(71)		(119)
Gross deferred income tax liabilities		(3,587)		(3,454)
Net deferred income tax asset/(liability)	$	—	$	—

Due to the uncertainty surrounding the realization of the benefits of our deferred tax assets in future tax periods, we have placed a valuation allowance against our deferred tax assets. The Company recognizes valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company’s net deferred income tax asset is not more likely than not to be realized due to the lack of sufficient sources of future taxable income and cumulative book losses that have resulted over the years. During the years ended December 31, 2014, the valuation allowance decreased by $21.4 million; during 2013 the valuation allowance increased by $3.0 million. Upon analysis, there were changes in ownership under Section 382 of the Internal Revenue Code and related state provisions. Section 382 limits the amount of net operating losses and tax credit forwards that may be available after a change in ownership. The Company has adjusted its net operating loss and tax credit carryforwards to reflect the impact of the section 382 limitations. The Company’s tax returns remain open to potential inspection for the years 2011 and onwards for federal purposes and 2010 and onwards for state purposes.

As of December 31, 2014, we had cumulative net operating loss carryforwards for federal and state income tax purposes of $169.2 million and $134.2 million respectively, and available tax credit carryforwards of approximately $15.2 million for federal income tax purposes and $11.5 million for state income tax purposes, which can be carried forward to offset future taxable income, if any.

Our federal net operating loss carryforwards expire starting in 2019, state net operating losses expire starting in 2015 and federal tax credit carryforwards expire starting in 2033. Utilization of the net operating losses and tax credits are subject to a substantial annual limitation due to “ownership changes” which occurred. As a result of these changes, provisions in the Internal Revenue Code of 1986 under Section 382 and similar state provisions may result in the expiration of certain of our net operating losses and tax credits before we could use them.