Income Taxes

The components of the Company's net deferred tax assets at December 31 are as follows:



	2013			2012

Deferred Tax Assets
Net operating loss and tax credits	$	2,144,460		$	1,159,865
Property and equipment and intangibles	214,478			153,361
Allowance for accounts receivable	235,446			74,362
Reserve for expired product	600,406			706,960
Inventory	1,495,895			1,185,419
Deferred charges	666,236			582,480
Cumulative compensation costs incurred on deductible equity awards	1,378,690			1,251,382
Total deferred tax assets	6,735,611			5,113,829

Deferred Tax Liabilities
Intangible assets	(2,683,587		)	(2,665,022		)
Net deferred tax assets, before valuation allowance	4,052,024			2,448,807
Less: deferred tax asset valuation allowance	(131,617		)	(108,318		)
Net deferred tax assets	$	3,920,407		$	2,340,489

As a result of the Exchange Program, discussed in Note 9 Shareholder's Equity, the Company recognized a deferred tax asset in 2012 related to the expected tax benefit of previously recognized compensation expense for incentive stock options that were exchanged. The deferred tax asset will be realized when the restrictions lapse on the restricted stock.

The following table summarizes the amount and year of expiration of the Company's federal and state net operating loss carryforwards as of December 31, 2013:



Years of expiration	Federal		State

2014	$	—	$	2,249,078
2015 - 2017	—		504,822
2018 - 2024	—		51,629,844
2029	43,398,774		—
2033	$	1,975,521	$	2,032,527
Total federal and state net operating loss carryforwards	$	45,374,295	$	56,416,271

The Company has total recognized carryforward tax assets of $0.3 million for charitable contribution carryforwards, foreign tax credits and AMT carryforwards. In addition, the Company has recognized as of December 31, 2013 federal Orphan Drug and Research and Development tax credits of $1.0 million that expire between 2021 and 2033.

The Company has unrecognized federal net operating loss carryforwards as a result of the exercise of nonqualified options of approximately $43.4 million. These benefits occurred as a result of the actual tax benefit realized upon an employee's exercise exceeding the cumulative book compensation charge associated with the awards and will be recognized in the year in which they are able to reduce current income taxes payable. Accordingly, deferred tax assets are not recognized for these net operating loss carryforwards or credit carryforwards resulting from the exercise of nonqualified options. The usage of these net operating losses carryforwards resulted in the Company paying minimal income taxes in 2009 through 2012, and the Company expects to pay minimal income taxes in 2014. The Company has $56.4 million of state net operating loss carryforwards. This amount includes $51.8 million from the exercise of nonqualified options during 2009. The state net operating loss carryforwards above include approximately $2.8 million that is subject to a full valuation allowance at December 31, 2013.

Income tax (expense) benefit includes the following components for the years ended December 31:



	2013			2012			2011

Current:
Federal	$	(45,287	)	$	(3,185,743	)	$	(1,992,804	)
State and other	(11,580		)	(820,669		)	(422,290		)
Total current income tax expense	(56,867		)	(4,006,412		)	(2,415,094		)

Deferred:
Federal	1,426,701			677,190			(1,543,261		)
State	153,217			84,446			(121,849		)
Total deferred income tax benefit (expense)	1,579,918			761,636			(1,665,110		)
Total income tax expense	$	1,523,051		$	(3,244,776	)	$	(4,080,204	)

The Company's deferred tax benefit in 2012 was primarily a result of the income tax benefit arising from the Exchange Program. The Company’s deferred tax expense in 2011 was primarily due to the write-off for tax purposes of the Kristalose license rights but maintained as a component of products rights for book purposes, and due to inventory write-downs.

Deferred income tax is comprised of the following components for the years ended December 31:



	2013			2012			2011

Deferred tax (expense) benefit, excluding items below	$	37,940		$	(39,870	)	$	439,744
Inventory write-downs	310,477			179,755			817,840
Creation of operating loss carryforwards	788,342			25,552			11,348
Creation (utilization) of tax credit carryforwards	196,631			108,699			56,395
Change in valuation allowance due to changes in net deferred tax asset balances	(23,299		)	(15,291		)	(13,597		)
Deductible equity awards	127,308			667,171			(330,329		)
Allowance for accounts receivable	161,084			—			—
Intangible assets	(18,565		)	(164,380		)	(2,646,511		)
Deferred income tax benefit (expense)	$	1,579,918		$	761,636		$	(1,665,110	)

The valuation allowance at December 31, 2013 and 2012 is primarily related to state tax benefits at CET that will likely not be realized.

The Company’s effective income tax rate for 2013, 2012 and 2011 reconciles with the federal statutory tax rate as follows:



	2013		2012		2011

Federal tax expense at statutory rate	34	%	34	%	35	%
State income tax expense (net of federal income tax benefit)	4	%	4	%	4	%
Permanent differences associated with general business credits	5	%	—	%	(1	)%
Permanent differences associated with stock options	—	%	(5	)%	2	%
Other permanent differences	—	%	3	%	2	%
Other	(1	)%	—	%	—	%
Net income tax expense	42	%	36	%	42	%

The Company’s 2009 federal tax return was selected for examination during 2012, and this examination was completed during the year with no significant findings or adjustments. Federal tax years that remain open to examination are 2010 through 2013. Due to a 2009 net operating loss carryback, federal tax years 2006 through 2008 remain open to the extent of net operating losses utilized in those years. State tax years that remain open to examination are 2008 to 2013. The Company has no unrecognized tax benefits in 2013, 2012 or 2011.

Excluding the alternative minimum tax (AMT) tax credits, the Company will need to generate future taxable income of approximately $11.3 million in order to fully realize the deferred tax assets. Taxable income (loss), excluding tax deductions generated by the exercise of nonqualified options, for 2013, 2012 and 2011 was a loss of approximately $(2.0) million, income of $9.4 million and income of $5.7 million, respectively. Based upon the level of taxable income over the last three years and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2013. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.