14. Income Taxes

The income tax provision (benefit) consists of the following (in thousands):

	Year Ended December 31,
	2016		2015
Current:
Federal	$	–	$	–
State		–		(365	)
Foreign		–		–
		–		(365	)
Deferred:
Federal	$	–	$	–
State		–		–
Foreign		–		–
		–		–
Total provision (benefit) for income taxes	$	-	$	(365	)

We did not record an income tax expense for the year ended December 31, 2016. We recorded an income tax benefit of $365,000 for the year ended December 31, 2015. The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows:

	Year Ended December 31,
	2016			2015			2014
Federal statutory income tax rate		34.0	%		34.0	%		34.0	%
State income taxes, net of federal benefit		0.0	%		-6.6	%		11.2	%
Federal and state credits		9.5	%		2.5	%		2.7	%
Stock based compensation		-0.1	%		0.0	%		-1.6	%
FIN 48 release		0.0	%		0.2	%		0.0	%
Other		0.1	%		0.0	%		-0.1	%
Change in valuation allowance		-38.6	%		-29.9	%		-46.2	%
Foreign Rate Differential		-4.9	%		0.0	%		0.0	%
Total tax benefit		0.0	%		0.2	%		0.0	%

The components of U.S. deferred tax assets and (liabilities) are as follows (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Federal and state net operating loss carryforwards	$	235,015		$	207,898
Federal and state research tax credit carryforwards		17,927			18,744
Federal Orphan Drug Credit		60,822			–
Deferred revenue		15,566			9,192
Stock options		18,734			10,197
Capitalized acquisition costs		819			974
Other		16,298			3,942
Net deferred tax assets before valuation allowance		365,181			250,947
Valuation allowance		(365,181	)		(250,947	)
Net deferred tax assets	$	–		$	–

The Company received orphan designation and was eligible to claim a federal orphan drug credit starting in 2015 and reported the credit in 2016.

Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence, including the fact that we have incurred significant losses in almost every year since our inception, management believes it is more likely than not that our deferred tax assets are not recognizable. Accordingly, deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $114.2 million and approximately $67.0 million for the year ended December 31, 2016 and 2015, respectively.

As of December 31, 2016, we had net operating loss carryforwards for federal income tax purposes of approximately $694.8 million and federal research tax credits of approximately $16.5 million and orphan drug credit of $71.6 million, which expire at various dates in the period from 2024 to 2036. We also have California net operating loss carry forwards of approximately $223.5 million which expire at various dates in the period from 2017 to 2032 and California research tax credits of approximately $6.4 million. Our federal and state net operating loss carryforwards as of December 31, 2016 include amounts resulting from exercises and sales of stock option awards to employees and non-employees. When we realize the tax benefit associated with these stock option exercises as a reduction to taxable income in our returns, we will account for the tax benefit as credit to stockholders' equity rather than as reduction of our income tax provision in our consolidated financial statements. Our federal net operating losses listed above include $41.9 million of excess stock option benefits that will be creditable to stockholder’s equity when realized.

Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event that we had a change of ownership, utilization of the net operating loss and tax credit carryforwards may be limited under section 382.

Uncertain Tax Positions

We are subject to taxation in the United States. We have not been audited by the Internal Revenue Service or any state tax authority. The Company is no longer subject to audit by the Internal Revenue Service for income tax returns filed before 2014, and by the material state and local tax authorities for tax returns filed before 2013. However, carryforward tax attributes that were generated prior to these years may still be adjusted upon examination by tax authorities.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
Unrecognized tax benefits, beginning of period	$	3,228		$	2,906		$	2,048
Increases due to current period positions		6,919			1,091			858
Decreases due to current period positions		–			–			–
Increase due to prior period positions		4,266			–			–
Decreases due to prior period positions		(548	)		(404	)		–
Decreases due to the lapse of statutes of limitations		–			(365	)		–
Unrecognized tax benefits, end of period	$	13,866		$	3,228		$	2,906

The amount of unrecognized income tax benefits that, if recognized, would affect our effective tax rate was $0 as of December 31, 2016 and December 31, 2015. If the $13.8 million and $3.2 million of unrecognized income tax benefits as of December 31, 2016 and 2015, respectively, is recognized, there would be no impact to the effective tax rate as any change will fully offset the valuation allowance. The Company does not expect that the unrecognized tax benefit will change within the next 12 months.