12. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is subject to U.S. federal, state and local income tax examinations for the years 2009 through 2012. However, certain returns from years prior to 2009, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.

Significant components of the Company's deferred tax assets and liabilities are as follows:

	December 31,
	2012			2011
Deferred tax assets and liabilities:
Accrued liabilities	$	(73,000	)	$	131,000
Beneficial conversion feature on convertible financial instruments		(449,000)			(927,000	)
Intangible assets		1,117,000			249,000
Property and equipment		89,000			(18,000	)
R&D Credit Carryforward		1,407,356			494,000
Stock Compensation		213,000			—
Adjust accrued earn-out liability		567,947			—
Charitable Contributions		3,000			—
Patent fees		6,000			—
Net operating loss		15,487,000			15,524,000
Net deferred tax assets	$	18,368,303		$	15,453,000

Valuation allowance		(18,368,303	)		(15,453,000	)
	$	—		$	—

The reconciliation of the Federal statutory income tax rate of 34% to the effective rate is as follows:

	12/31/2012			12/31/2011
Federal statutory rate		34.00	%		34.00	%
State taxes, net of federal benefit		3.40	%		5.34	%
Permanent items & other		6.51	%		(11.30	%)
Valuation allowance		(43.91	%)		(28.04	%)
		—	%		—	%

Income taxes are based on estimates of the annual effective tax rate and evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.

The Company has incurred net losses since its inception, and therefore, no current income tax liabilities have been incurred for the periods presented. The amount of federal operating loss carryforwards was approximately $42,700,000 at December 31, 2012, and $41,400,000 at December 31, 2011. The loss carryforwards will expire at various dates beginning in 2026 through 2032 if not utilized. A valuation allowance is recorded to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that a portion or none of the deferred tax assets will be realized. After consideration of all the evidence, including reversal of deferred tax liabilities, future taxable income and other factors, management has determined that a full valuation allowance is necessary as of December 31, 2012 and 2011. Additionally, the Company has various tax credit carryforwards of approximately $1,400,000 as of December 31, 2012. The tax credit carryforwards will expire at various dates beginning in 2025 through 2032 if not utilized.

The Company's net operating losses and credits could be subject to annual limitations due to ownership change limitations provided by Internal Revenue Code Section 382. An annual limitation could result in the expiration of net operating losses and tax credit carryforward before utilization. At this time the Company does not believe its carryforwards or credits will be materially impacted by such limitations.