(15) Income Taxes

Loss before income tax expense for the United States of America and the State of Israel for the years ended December 31, 2012, 2011 and 2010 consisted of:

	2012			2011			2010

Loss before income tax expense:
United States of America	$	(23,482,045	)	$	(8,729,693	)	$	(4,050,035	)
State of Israel		(10,468,470	)		(1,990,084	)		—

	$	(33,950,515	)	$	(10,719,777	)	$	(4,050,035	)

Income tax expense attributable to income from continuing operations for the years ended December 31, 2012, 2011 and 2010 consisted of:

	2012		2011		2010

Current income tax expense:
Federal	$	—	$	—	$	—
State		12,033		74,959		72,782
Foreign		—		—		—

		12,033		74,959		72,782

Deferred income tax expense:
Federal		—		—		—
State		—		—		—
Foreign		—		—		—

		—		—		—
Total income tax expense	$	12,033	$	74,959	$	72,782

The following table summarizes the significant differences between the United States federal statutory tax rate and the Company's effective tax rate for financial statement reporting purposes:



Statutory tax rate	34	%	34	%	34	%
Stock-based compensation on ISO's	(7	)	(17	)	(8	)
State tax, net of federal benefit	—		(1	)	(2	)
Change in valuation allowance	(27	)	(17	)	(26	)

Total	—	%	(1	)%	(2	)%

The tax effects of temporary differences that give rise to the deferred tax asset at December 31, 2012 and 2011 are as follows:

	2012			2011

Deferred tax assets:
Net operating loss carryforwards	$	101,486,000		$	97,696,000
Accrued expenses		2,569,000			2,110,000
Intangibles		284,000			282,000
Reserves		858,000			854,000
Depreciation		140,000			105,000

Net deferred tax assets		105,337,000			101,047,000
Less valuation allowance		(104,458,000	)		(98,402,000	)

Deferred tax assets		879,000			2,645,000

Deferred tax liabilities:
Acquired intangible assets		(879,000	)		(2,645,000	)

Net deferred tax assets (liabilities)	$	—		$	—

The valuation allowance increased by approximately $6.1 million during the year ended December 31, 2012 and increased approximately $80,000 during the year ended December 31, 2011.

Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets and liabilities. At December 31, 2012 and 2011, Wave's historical operating results, its cumulative loss positions and uncertainty surrounding its forecasts, led management to conclude that a valuation allowance of $104,458,000 and $98,402,000, respectively, is needed to offset its deferred tax assets. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2012 will be allocated as follows: $103,718,000 to continuing operations and $740,000 to additional paid-in-capital for amounts attributable to exercises of employee stock options.

Wave has federal and state net operating loss carryforwards of approximately $286,900,000, which expire beginning in 2012 through 2031 and include approximately $7,700,000 of net operating loss carryforwards of Safend, Inc., a wholly owned US-based subsidiary of Safend. Pursuant to Section 382 of the Internal Revenue Code, the annual utilization of Wave's net operating and capital loss carryforwards may be substantially limited if a cumulative change in ownership of more than 50% occurs within any three-year period. Wave has not determined whether there have been such cumulative changes in ownership or the impact on the utilization of the loss carryforwards if such changes have occurred. However, in considering Section 382 of the Internal Revenue Code, Wave believes that it is likely that such a change in ownership has occurred thus raising the likelihood that such net operating and capital loss carryforwards are subject to annual limitations. In addition, the Company maintains approximately $17,000,000 of operating loss carryforwards associated with Safend, Ltd.

The following table summarizes the activity related to the Company's gross unrecognized tax benefits at December 31, 2012, 2011 and 2010:

	2012		2011		2010

Balance at beginning of year	$	—	$	—	$	5,165,535
Increases related to current tax positions		—		—		—
Decreases related to prior year tax positions		—		—		(5,165,535	)

Balance at end of year	$	—	$	—	$	—

The unrecognized tax benefits, if recognized, would not have affected the Company's effective tax rate because the Company has recorded a full valuation allowance against its net deferred tax assets. The decreases related to prior year tax positions are attributable to an amendment to tax deductions previously taken on the Company's tax returns.

The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company files United States Federal and state income tax returns. In general, the statute of limitations with respect to the Company's United States Federal income taxes has expired for years prior to 2008, and the relevant state statutes vary. However, preceding years remain open to examination by United States Federal and state taxing authorities to the extent of future utilization of net operating losses and capital losses generated in each preceding year. The Company does not anticipate that the total unrecognized tax benefits will change significantly prior to December 31, 2013. As described above, utilization of the Company's loss carryforwards may be limited pursuant to Section 382 of the Internal Revenue Code. Any limitation may result in expiration of a portion of the net operating and capital loss carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position.