10. Income Taxes

The components of the Company’s income tax provision (benefit) are as follows (in thousands):


	Year Ended
	December 31,
	2014		2013		2012
Current:
Federal	$	—	$	—	$	—
State		63		7		3
Total current provision		63		7		3
Deferred:
Federal		540		504		(318)
State		37		68		(291)
Total deferred provision (benefit)		577		572		(609)
Total income tax provision (benefit)	$	640	$	579	$	(606)

As described below, the Company has established a valuation allowance against its net deferred tax assets as the Company has determined that it is more likely than not that the deferred tax assets will not be realized. The Company’s 2014 and 2013 income tax provisions of $0.6 million reflected the amortization of tax deductible goodwill that is not an available source of income to realize deferred tax assets. The Company’s income tax benefit in 2012 of $0.6 million reflected a tax benefit of $1.1 million associated with a beneficial conversion feature on its convertible notes payable issued in May 2012 (Note 5), which was partially offset by tax expense related to the amortization of tax deductible goodwill that is not an available source of income to realize deferred tax assets.

The overall effective income tax rate differs from the statutory federal rate of 34% as follows:


	Year Ended
	December 31,
	2014		2013		2012
Income tax benefit based on the federal statutory rate	34.0	%	34.0	%	34.0	%
State income taxes, net of federal benefit	2.0		(0.9)		7.6
Nondeductible expenses	(0.7)		(1.5)		(0.1)
Change in valuation allowance	(34.7)		(26.3)		(40.0)
Stock-based compensation	(2.0)		(8.3)		(0.9)
Other	0.1		0.6		0.2
Overall effective income tax rate	(1.3)	%	(2.4)	%	0.8	%

The components of deferred tax assets (liabilities) are as follows (in thousands):


	December 31,
	2014		2013
Deferred income tax assets:
Net operating loss carryforwards	$	56,957	$	49,921
Stock-based compensation		18,648		8,262
Accrued expenses		1,932		2,852
Research and development tax credits		610		610
Other		277		172
Gross deferred tax assets		78,424		61,817
Valuation allowance		(64,449)		(47,858)
Net deferred tax assets		13,975		13,959
Deferred tax liabilities:
State taxes		(3,802)		(3,296)
Property, equipment and software		(3,985)		(3,353)
Intangible assets and goodwill		(8,020)		(8,566)
Gross deferred tax liabilities		(15,807)		(15,215)
Total net deferred tax liabilities	$	(1,832)	$	(1,256)

The net deferred tax liability at December 31, 2014 and 2013 relates to amortization of tax deductible goodwill that is not an available source of income to realize deferred tax assets. Accordingly, the net deferred tax liability does not reduce the need for a valuation allowance related to the Company’s net deferred tax assets.

At December 31, 2014, the Company had federal and state net operating loss carryforwards of $167.7 million and $125.9 million, respectively. The Company’s federal and state net operating loss carryforwards begin to expire in the years ending December 31, 2025 and 2019, respectively. At December 31, 2014, the Company had federal and state research and development tax credit carryforwards of approximately $0.8 million and $0.4 million, respectively. The federal tax credit carryforwards begin to expire in the year ending December 31, 2028. The state tax credit carryforward can be carried forward indefinitely.

The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses and other tax attributes in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change net operating loss and research tax credits may be limited as prescribed under IRC Sections 382 and 383. Events which may cause limitation in the amount of the net operating losses and credits that the Company utilizes in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. As a result of historical equity issuances, the Company has determined that annual limitations on the utilization of its net operating losses and credits do exist pursuant to IRC Sections 382 and 383, however, such limitations are not expected to impact the Company’s ability to utilize these deferred tax assets prior to their statutory expiration dates.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2014. Such objective evidence limits the ability to consider other subjective evidence such as its projections for future growth. On the basis of this evaluation, at December 31, 2014, a valuation allowance of $64.4 million has been recorded since it is more likely than not that the deferred tax assets will not be realized.

The change in the valuation allowance for the years ended December 31, 2014, 2013, and 2012 is as follows (in thousands):


	Year Ended
	December 31,
	2014		2013		2012
Valuation allowance, at beginning of year	$	47,858	$	41,412	$	11,348
Increase in valuation allowance		16,591		6,446		30,064
Valuation allowance, at end of year	$	64,449	$	47,858	$	41,412

As a result of certain realization requirements of ASC 718, Compensation — Stock Compensation, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at December 31, 2014 and 2013 that arose directly from (or the use of which was postponed by) tax deductions related to stock-based compensation that are greater than the compensation recognized for financial reporting purposes. The gross and tax-effected amount of unrealized net operating loss carryforwards resulting from stock-based compensation was $30.1 million and $11.1 million, respectively, at December 31, 2014. Additional paid-in capital will be increased by $11.1 million if and when such deferred tax assets are ultimately realized. The Company uses the with-and-without approach when determining when excess tax benefits have been realized.

The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):


	Year Ended
	December 31,
	2014		2013		2012
Unrecognized tax benefit, beginning of year	$	(4)	$	(4)	$	—
Additions based on current year tax positions		21		—		610
Additions for prior years' tax positions		29		—		—
Reductions for prior years' tax positions		—		—		(614)
Unrecognized tax benefit, end of year	$	46	$	(4)	$	(4)

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. ASU 2013-11 provides that an entity’s unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with one exception. That exception states that, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. In accordance with this accounting guidance, the Company’s unrecognized tax benefits are recorded as an adjustment to the deferred tax assets to the extent deferred tax assets may be utilized to settle uncertain tax positions. Since there is a full valuation allowance recorded against the deferred tax assets, any subsequent reductions of the valuation allowance and recognition of the associated tax benefit would impact the effective tax rate.

The Company’s policy is to recognize interest and penalties related to uncertain tax positions, if any, in the income tax provision. At December 31, 2014, the Company had less than $0.1 million accrued interest and penalties related to uncertain tax positions. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

The Company is subject to United States federal and state taxation. Due to the presence of net operating loss carryforwards, all income tax years remain open for examination by the Internal Revenue Service (“IRS”) and various state taxing authorities. The Company is currently under federal examination for the 2011 and 2012 tax years and under state tax examination for the 2010 through 2012 years. The Company does not anticipate that these pending tax examinations will result in material tax assessments and it believes its income tax accruals as of December 31, 2014 are reasonable.