16. Income taxes

There is no provision for income taxes because the Company has incurred operating losses since inception. At December 31, 2015, the Company has concluded that it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to its history of losses. Accordingly, the net deferred tax assets have been fully reserved. The provision for income taxes consists of the following (in thousands):


	Year Ended December 31,
	2015			2014			2013
Current
U.S. federal	$	—		$	—		$	—
U.S. state		—			—			—
Non-U.S.		—			—			—

Total current		—			—			—

Deferred
U.S. federal		109,512			57,873			59,379
U.S. state		(29,394	)		7,631			7,470
Non-U.S.		—			—			—
Valuation Allowance		(80,118	)		(65,504	)		(66,849	)

Total deferred		—			—			—

Total	$	—		$	—		$	—

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when uncertainty exists as to whether all or a portion of the net deferred tax assets will be realized. Components of the net deferred tax asset as of December 31, 2015 and 2014 are approximately as follows (in thousands):


	December 31,
	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	721,588		$	699,997
Research and development credits		73,646			73,227
Capitalized research		5,872			28,516
Payments from collaboration		52,484			19,217
Milestone Rights		3,242			5,321
Accrued expenses		251			768
Loss on purchase commitment		24,084			—
Non-qualified stock option expense		16,941			43,691
Capitalized patent costs		8,574			8,624
Other		7,186			131
Depreciation		48,755			3,010

Total net deferred tax assets		962,623			882,502
Valuation allowance		(962,623	)		(882,502	)

Net deferred tax assets	$	—		$	—

As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of December 31, 2015 that arose directly from tax deductions related to equity compensation which are greater than the compensation recognized for financial reporting. Equity would be increased by $10.0 million if and when such deferred tax assets are ultimately realized. The Company considered the requirements under ASC 740 Income Taxes (“ASC 740”) when determining when excess tax benefits have been realized.

The Company’s effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2015, 2014 and 2013:


	December 31,
	2015			2014			2013
Federal tax benefit rate		35.0	%		35.0	%		35.0	%
State tax benefit, net of federal benefit		—			—			—
Permanent items		—			0.9			—
Intercompany transfer of intellectual property		(1.0	)		(4.1	)		(4.3	)
Valuation allowance		(34	)		(31.8	)		(30.7	)

Effective income tax rate		0.0	%		0.0	%		0.0	%

As required by ASC 740, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of its deferred tax assets. Accordingly, the net deferred tax assets have been fully reserved. Management reevaluates the positive and negative evidence on an annual basis. During the years ended December 31, 2015, 2014 and 2013, the change in the valuation allowance was $~~62.6~~ 80.1 million, $65.5 million and $~~80.1~~ 66.8 million, respectively, for income taxes.

At December 31, 2015, the Company had federal and state net operating loss carryforwards of approximately $1.9 billion and $1.3 billion available, respectively, to reduce future taxable income. The federal net operating loss carryforwards will expire at various dates beginning in 2018 and the state net operating loss carryforwards have started expiring, starting current year through various future dates. As a result of the Company’s initial public offering, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in August 2004. As a result, federal net operating loss and credit carry forwards of approximately $216.0 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the Section 382 limitation for those years. The federal net operating losses generated subsequent to the Company’s initial public offering in August 2004 are currently not subject to any such limitation as there have been no ownership changes since August 2004 within the meaning of Internal Revenue Code Section 382. At December 31, 2015, the Company had research and development credits of $49.1 million and $37.7 million for federal and state purposes, respectively. The federal credits begin to expire in 2024, and the state credits may be carried forward indefinitely.

The Company has evaluated the impact of ASC 740, previously FIN 48 Accounting for Uncertainty in Income Taxes , on its financial statements, which was effective beginning January 1, 2007. The evaluation of a tax position in accordance with this guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. Tax years since 2011 remain subject to examination by the major tax jurisdictions in which the Company is subject to tax.