5. INCOME TAXES

 

The components of the provision for income taxes are as follows:

 

 

 

 

The tax provision expense for the year ended December 31, 2013 and 2012 related to Texas state income taxes. The Company incurred operating losses during 2013 and has maintained a valuation allowance equal to the net deferred tax asset.

 

The difference between the Company’s effective income tax rate and federal statutory rate consisted of the following:

 

 

 

Deferred tax assets consist of the following at:

 

 

 

 The Company maintains that a full valuation allowance should be accounted for against its net deferred tax assets at December 31, 2013 and 2012. The Company supports the need for a valuation allowance against the deferred tax assets due to negative evidence including cumulative losses in recent years and management’s expectations for the future.

 

At December 31, 2013, the Company had approximately $113.7 million of federal and $81.8 million of state net operating loss carryforwards available to reduce future taxable income, which will begin to expire in 2019 for federal and 2014 for state tax purposes, respectively.

 

Approximately $5.4 million and $5.4 million of net operating loss carryforwards for federal and state income tax purposes, respectively, are attributable to employee stock option deductions, the benefit from which will be allocated to paid-in-capital rather than current income when subsequently recognized.

 

Federal and state tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. If an ownership change has occurred, utilization of the net operating loss carryforwards could be reduced significantly.

 

The Company does not have any material accrued interest or penalties associated with any unrecognized tax benefits. The Company will account for any interest related to uncertain tax positions as interest expense, and for penalties as tax expense. The Company does not believe it is reasonably possible that its unrecognized tax benefits will significantly change within the next twelve months. There were no material changes in the amount of unrecognized tax benefits as of December 31, 2013. The Company is subject to taxation from the United States and various state jurisdictions. Due to the unutilized losses carried forward from earlier years, our tax years 1999-2003 and 2006-2013 are generally open to exam.