Income Taxes

9 Months Ended

Sep. 30, 2014

Income Taxes. Income tax expense was $1.6 million and $0.4 million for the three months ended September 30, 2014 and 2013, respectively. Income tax expense was $2.6 million and $1.6 million for the nine months ended September 30, 2014 and 2013, respectively. Income tax expense in the three and nine month periods of 2014 and 2013 was based on the U.S. statutory rate of 34%, increased by state income taxes.

In the nine month period ended September 30, 2014, we utilized deferred tax assets to reduce our tax liability payable to the government. A portion of the deferred tax assets we used comprised cumulative deductions for stock options in excess of book expense. Under income tax accounting rules, that portion of tax benefits attributable to such deductions must be recorded as an adjustment to equity versus a reduction of income tax expense. The tax benefits from such stock-based awards were $1.5 million in the nine month period ended September 30, 2014. These tax benefits were recorded as an equity adjustment to additional paid-in capital.

As of September 30, 2014, we had a total of $0.9 million of deferred tax assets for which we had recorded no valuation allowance. We will continue to assess the level of valuation allowance in future periods. Should evidence regarding the realizability of tax assets change at a future point in time, the valuation allowance will be adjusted accordingly.

In addition to deferred tax assets carried on our balance sheet, we also had net federal and state research and development credit carryforwards available at December 31, 2013 of $4.9 million and $0.7 million. These credits were not recorded as tax assets as they relate to excess stock compensation deductions that may not be recorded as tax assets under generally accepted accounting principles until the amounts have been utilized to reduce our tax liability. To the extent that these assets are used to reduce future taxes, the benefit will be recorded as a reduction to additional paid-in capital. The aforementioned $1.5 equity adjustment to additional paid-in capital in the nine month period ended September 30, 2014 was related to these deferred tax assets.

In the third quarter of 2014, the Internal Revenue Service commenced an examination of our tax return for the year ended December 31, 2012.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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