11.	INCOME TAXES

The Company accounts for income taxes under the liability method. Under the liability method, deferred income taxes are recognized for the income tax consequences of “temporary differences” by applying enacted statutory income tax rates applicable to future years to differences between the financial statement carrying amounts and the income tax bases of existing assets and liabilities.

Income tax net (expense) benefit comprises the following:

	Year Ended December 31,
	2014			2013
Current:
Federal	$	-		$	-
State		(7,749	)		(22,929	)
Total		(7,749	)		(22,929	)

Deferred:
Federal		(3,691,163	)		408,871
State		(353,051	)		(116,657	)
Total		(4,044,214	)		292,214
Income tax net (expense) benefit	$	(4,051,963	)	$	269,285

Significant components of the Company’s deferred income tax assets are as follows:

	December 31,
	2014			2013
Current:
Reserves and accruals	$	1,472,997		$	1,298,557
Prepaid expenses		(48,427	)		(42,801	)
Valuation allowance		(1,424,570	)		(57,924	)
Total	$	-		$	1,197,832

	December 31,
	2014			2013
Noncurrent:
Federal NOL carryforwards	$	4,185,179		$	1,884,118
State NOL carryforwards		616,655			460,652
Hong Kong NOL carryforwards		995,566			995,566
Federal benefit on state taxes under uncertain tax positions		128,026			123,865
Stock-based compensation		189,045			30,724
Investment loss		9,373			9,429
Research tax credit		434,637			434,637
Alternative minimum tax credit		348,264			348,264
Contributions carryforward		3,929			1,095
Depreciation		(418,154	)		(366,863	)
Accrued rent		297,362			-
Loss on impairment of long-lived assets		53,533			53,395
Valuation allowance		(6,843,415)			(1,132,991	)
Total		-			2,841,891
Total deferred income tax assets, net	$	-		$	4,039,723

A reconciliation between expected income taxes, computed at the statutory federal income tax rate of 34% applied to pretax accounting loss, and the income tax benefit (expense) included in the consolidated statements of operations for the years ended December 31, 2014 and 2013 is as follows:

	Year Ended December 31,
	2014			2013
Anticipated income tax benefit at statutory rate	$	3,075,321		$	530,529
State income tax benefit (expense), net of federal tax effect		215,109			(90,099	)
Capital loss carryforward expiration		-			(44,750	)
Income tax effect of uncertain tax positions		(8,080	)		(12,180	)
Return to provision adjustments		(2,751	)		(8,092	)
Stock-based compensation		(279,985	)		(81,564	)
Other changes in deferred income tax assets, net		25,493			(25,416	)
(Increase) decrease in valuation allowance		(7,077,070	)		857
Income tax net (expense) benefit	$	(4,051,963	)	$	269,285

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. The Company determined that sufficient positive evidence existed as of December 31, 2013 to conclude that it is more likely than not that certain deferred tax assets of $4.04 million were realizable and recorded approximately $281,000 of income tax benefit to adjust these deferred tax assets. A valuation allowance remained at December 31, 2013 against certain deferred tax assets relating to state net operating loss carryforwards from the Company’s e-commerce and home party operating subsidiaries due to the timing uncertainty of when the subsidiaries will generate cumulative positive taxable income to utilize the associated deferred tax assets. A valuation allowance also remained at December 31, 2013 against certain deferred tax assets relating to investment loss carryforwards because the Company did not anticipate it would generate sufficient investment income to utilize the carryforwards. The Company also previously considered various strategic alternatives, resulting in management determining that a valuation allowance was not necessary at that time. During the three months ended June 30, 2014, the Company’s management determined that such strategic alternatives were no longer in the best interest of the Company. Accordingly, the Company’s management concluded that the positive evidence was no longer sufficient to offset available negative evidence, primarily as a result of the pre-tax operating losses incurred during the six months ended June 30, 2014, and forecasted to continue through the remainder of 2014. As a result, the Company’s management concluded that it was uncertain that the Company would have sufficient future taxable income to utilize its deferred tax assets, and therefore, the Company established a valuation allowance against its deferred tax assets, resulting in a tax expense of $4.04 million for the year ended December 31, 2014. During the year ended December 31, 2014, the Company also recognized approximately $12,000 of income tax expense for interest associated with uncertain tax positions.

As of December 31, 2014, the Company had approximately $882,000 of remaining federal income tax credits, $533,000 of which expire between 2018 and 2021 and the balance without an expiration, which can be carried forward to offset future income taxes. As of December 31, 2014, the Company had federal tax net operating loss carryforwards under U.S. GAAP of approximately $12.44 million, expiring between 2020 and 2034, which can be used to offset against future federal taxable income, North Carolina tax net operating loss carryforwards across all of the entities of approximately $14.64 million expiring between 2023 and 2029, and various other state tax net operating loss carryforwards expiring between 2016 and 2034, which can be used to offset against future state taxable income.

As of December 31, 2014, there was approximately $6.03 million in net operating loss carryforwards in Hong Kong. In accordance with the Hong Kong tax code, these amounts can be carried forward indefinitely to offset future taxable income in Hong Kong. The Company’s deferred tax assets in Hong Kong were fully reserved with a valuation allowance of $996,000 as of December 31, 2014 and 2013 and had been fully reserved in all prior periods due to the uncertainty of future taxable income in this jurisdiction to utilize the deferred tax assets.

Uncertain Tax Positions

The gross liability for income taxes associated with uncertain tax positions at December 31, 2014 was approximately $506,000. This amount is shown net of approximately $98,000 recorded as a direct reduction to the associated deferred tax asset. The gross liability, if recognized, would favorably affect the Company’s effective tax rate.

The Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component of the provision for income taxes. For each of the years ended December 31, 2014 and 2013, the Company accrued approximately $12,000 of interest and penalties associated with uncertain tax positions. Including the interest and penalties recorded for uncertain tax positions, there is a total of approximately $139,000 and $127,000 of interest and penalties included in the accrued income tax liability for uncertain tax positions at December 31, 2014 and 2013, respectively. To the extent interest and penalties are not ultimately incurred with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

In all of the significant federal and state jurisdictions where it is required to file income tax returns, the Company has analyzed filing positions for all tax years in which the statute of limitations is open. The only periods subject to examination by the major tax jurisdictions where the Company does business are the 2011 through 2013 tax years. The Company does not believe that the outcome of any examination will have a material impact on its consolidated financial statements and does not expect settlement on any uncertain tax positions within the next 12 months.

The following summarizes the activity related to the Company’s gross liability for uncertain tax positions from January 1, 2013 through December 31, 2014:

Balance as of January 1, 2013	$	482,510
Increases related to prior year tax positions		11,712
Balance as of December 31, 2013		494,222
Increases related to prior year tax positions		12,241
Balance as of December 31, 2014	$	506,463