9. Income Taxes

On January 1, 2009, the Company adopted authoritative guidance relating to the accounting for uncertainty in income taxes. The guidance clarified the recognition threshold and measurement attributes for financial statement disclosure of tax positions taken, or expected to be taken, on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain tax position will not be recognized if it has a less than 50% likelihood of being sustained. On the date of adoption, there were no unrecognized tax benefits. Further, there is no unrecognized tax benefit included in the Company’s balance sheets at December 31, 2013 and 2012 that would, if recognized, affect the Company’s effective tax rate.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the balance sheets at December 31, 2013 and 2012. The Company is subject to taxation in the United States and state jurisdictions, and as of December 31, 2013, the Company’s tax years beginning 2007 to date are subject to examination by taxing authorities. The Company does not foresee material changes to its gross uncertain income tax position liability within the next twelve months.

A reconciliation of the federal statutory income tax rate and the effective income tax rate is as follows for the years ended December 31:


	December 31,
	2013 (%)			2012 (%)			2011 (%)
Federal statutory rate		34.0			34.0			34.0
Change in valuation allowance		(2.5	)		(4.9	)		(0.2	)
State income taxes, net of federal effect		5.8			5.8			5.8
Research and development credits		4.3			1.5			4.2
Removal of net operating loss and other credits		(39.5	)		(36.4	)		(43.9	)
Other		(2.1	)		(0.0	)		0.1

Effective income tax rate		0.0			0.0			0.0

Pursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has not completed an IRC Section 382/383 analysis regarding the limitation of net operating loss and research and development credit carryforwards. Until this analysis has been completed, the Company has removed the deferred tax assets for net operating losses of approximately $8.4 million and a research and development credit of approximately $931,000 generated through December 31, 2013 from its deferred tax asset schedule, and has recorded a corresponding decrease to its valuation allowance. When this analysis is finalized, the Company plans to update its unrecognized tax benefits accordingly. The Company does not expect this analysis to be completed within the next twelve months and, as a result, the Company does not expect that the unrecognized tax benefits will change within twelve months of this reporting date. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Significant components of the Company’s deferred tax assets at December 31, 2013 and 2012 are as follows:


	December 31,
	2013			2012
Deferred tax assets:
Acquired technology	$	147,000		$	164,000
Other, net		290,000			203,000

Total deferred tax assets		437,000			367,000
Less valuation allowance		(437,000	)		(367,000	)

Net deferred tax assets	$	—		$	—

At December 31, 2013, the Company has federal and state net operating loss carryforwards of approximately $21.2 million and $20.7 million, respectively. The federal and state loss carryforwards begin to expire in 2027 and 2017, respectively, unless previously utilized. The Company also has federal and state research tax credit carryforwards of approximately $627,000 and $459,000, respectively. The federal research credit carryforwards will begin expiring in 2027 unless previously utilized. The state research credit will carry forward indefinitely.