14. Income Taxes

The primary components of the deferred tax assets and liabilities at December 31, 2015 and 2014 were as follows (in thousands):

Deferred tax assets/(liabilities):	2015			2014
Net operating loss carryforwards	$	78,268		$	58,693
Research & development and other credits		8,331			5,230
Patents and licenses		(6,860	)		(8,153	)
Equity method investment gain		(1,333	)		-
Stock options		670			1,561
Other, net		(263	)		(1	)
Total		78,813			57,329
Valuation allowance		(78,813	)		(61,844	)
Net deferred tax liabilities	$	-		$	(4,515	)

Income taxes differed from the amounts computed by applying the U.S. federal income tax of 34% to pretax losses from operations as a result of the following:

	Year Ended December 31,
	2015			2014			2013
Computed tax benefit at federal statutory rate		34	%		34	%		34	%
Research & development and other credits		2	%		3	%		-
Permanent differences		(4	%)		(1	%)		(15	%)
Losses for which no benefit has been recognized		(34	%)		(24	%)		(18	%)
State tax benefit, net of effect on federal income taxes		10	%		3	%		4	%
Foreign rate differential		(1	%)		(1	%)		1	%
		7	%		14	%		6	%

As of December 31, 2015, BioTime has net operating loss carryforwards of approximately $166.1 million for federal and $105.3 million for state tax purposes, which expire in varying amounts between 2016 and 2035. In addition, as of December 31, 2015 BioTime has research tax credit carryforwards for federal and state tax purposes of $4.1 million and $4.2 million, respectively. The federal tax credits expire between 2018 and 2035, while the state tax credits have no expiration date. As of December 31, 2015, BioTime’s subsidiaries have foreign net operating loss carryforwards of approximately $59.7 million which carry forward indefinitely.

A deferred income tax benefit of $4.5 million was recorded for the year ended December 31, 2015, of which $4.8 million was related to the federal benefit and $290,000 was related to state tax expense. A deferred income tax benefit of $7.4 million was recorded for the year ended December 31, 2014, of which $5.2 million of the benefit was related to federal and $2.2 million was related to state taxes. This deferred tax benefit was wholly attributable to BioTime’s majority owned and consolidated subsidiary, Asterias. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Except as disclosed above for Asterias, BioTime established a valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. Asterias established deferred tax liabilities primarily related to its acquisition of certain intellectual property. It is more likely than not that the Asterias deferred tax assets are fully realizable since these income tax benefits are expected to be available to offset such Asterias deferred tax liabilities. As BioTime and Asterias file separate U.S. federal tax returns, they may not use each other's tax attributes. Accordingly, BioTime has established a valuation allowance only pertaining to its deferred tax assets presented in the consolidated balance sheet as of December 31, 2015 and 2014.

In June 2014, Asterias sold 5,000,000 BioTime shares that resulted in a taxable gain of approximately $10.3 million. Asterias received the BioTime shares from BioTime as part of the consideration for the Asterias common stock and warrants issued to BioTime under an Asset Contribution Agreement among BioTime, Asterias, and Geron Corporation, in a tax free transaction. This taxable gain was offset by available net operating losses, resulting in no income taxes due from the sale.

During 2015 and 2014, OncoCyte sold 259,712 and 406,756 BioTime common shares, respectively, in open market transactions that resulted in a taxable gain of $815,000 and $1.3 million respectively. This taxable gain was fully offset by current operating losses resulting in no income taxes due from the sale. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. OncoCyte established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets.

On December 31, 2015, BioTime distributed 4.7 million shares of OncoCyte common stock to its shareholders on a pro rata basis. The distribution was accounted for as a dividend in kind for financial reporting purposes (see Note 9). For income tax purposes, the distribution is treated as if BioTime had sold the shares at their fair market value, resulting in a taxable gain to BioTime of approximately $7.4 million. As the distribution was treated as a dividend in kind for financial reporting purposes, BioTime recorded the tax effect of the gain in equity instead of the tax provision in accordance ASC 740-20-45-11(g). BioTime has sufficient current year losses from operations to offset the entire taxable gain resulting in no income taxes due.

As part of the above distribution of OncoCyte common stock, Asterias, as it also holds BioTime common stock, received 192,644 shares of OncoCyte common stock resulting in a taxable gain to Asterias of $819,000. Asterias has sufficient current year losses from operations to offset the entire taxable gain resulting in no income taxes due. As the distribution was treated as a dividend in kind for financial reporting purposes, the tax effect of this gain was recorded in equity instead of the tax provision consistent with BioTime’s treatment of the distribution.

In connection with the above transactions related to the taxable gains, BioTime and subsidiaries utilized approximately $9.1 million in net operating loss carryforwards with a corresponding release of the valuation allowance recorded through equity in accordance with ASC 740-20-45-11(g).

Internal Revenue Code Section 382 places a limitation (“Section 382 Limitation”) on the amount of taxable income that can be offset by net operating loss (“NOL”) carryforwards after a change in control (generally greater than 50% change in ownership within a three-year period) of a loss corporation. California has similar rules. Generally, after a control change, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods.

BioTime files a U.S. federal income tax return as well as various state and foreign income tax returns. In general, BioTime is no longer subject to tax examination by major taxing authorities for years before 2011. Although the statute is closed for purposes of assessing additional income and tax in these years, the taxing authorities may still make adjustments to the net operating loss and credit carryforwards used in open years. Therefore the statute should be considered open as it relates to the net operating loss and credit carryforwards.

BioTime's practice is to recognize interest and penalties related to income tax matters in tax expense. As of December 31, 2015, BioTime has no accrued interest and penalties. BioTime may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. BioTime's management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.