Components of the deferred tax asset of Biosante Pharmaceuticals, Inc., are shown in Exhibit 2.10. The company had no deferred tax liabilities.

At December 31, 2008, the company had approximately $62,542,000 of net operating loss carryforwards available to reduce future taxable income for a period of up to 20 years. The net operating loss carryforwards expire in 2018€“2028. The net operating loss carryforwards as well as amortization of various intangibles, principally acquired in process research and development, generate deferred tax benefits that have been recorded as deferred tax assets and are entirely offset by a tax valuation allowance. The valuation allowance has been provided at 100% to reduce the deferred tax assets to zero, the amount management believes is more likely than not to be realized. In addition, the company has provided a full valuation allowance against $3,415,143 of research and development credits, which are available to reduce future income taxes, if any, through 2028.

REQUIRED
a. At the end of 2008, the largest deferred tax asset is for net operating loss carryforwards. (Net operating loss carryforwards, also referred to as tax loss carryforwards, are amounts reported as taxable losses on tax filings. 

Because the tax authorities generally do not €˜€˜pay€™€™ corporations for incurring losses, companies are allowed to €˜€˜carry forward€™€™ taxable losses to future years to offset taxable income. These future tax benefits give rise to deferred tax assets.) As of the end of 2008, what is the dollar amount of the company€™s net operating loss carryforwards? What is the dollar amount of the deferred tax asset for the net operating loss carryforwards? Describe how these two amounts are related. 

b. Biosante has gross deferred tax assets of $28,946,363. However, the net deferred tax assets balance is zero. Explain.
c. The valuation allowance for the deferred tax asset increased from $21,818,084 to $28,946,363 between 2007 and 2008. How did this change affect the company€™s net income?

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Exhibit 2.10 Bi osante Pharmaceuticals, Inc. Income Tax Disclosures (Problem 2.16) 2008 2007 $ 17,588,392 $ 23,609,594 403,498 Net operating loss carryforwards Tax basis in intangible assets 538,819 2,569,848 Research and development aedits 3,415,143 Stock option expense 1,462,065 1,017,790 103,235 $ 21,818,084 (21,818,084) Other 56,063 $ 28,946,363 (28,946,363) Gross Deferred Tax Asset Valuation allowance Net Deferred Tax Asset Biosante Pharmaceuticals, Inc. Income Tax Disclosures (Problem 2.16) 2007 2008 Net operating loss carryforwards Tax basis in intangible assets Research and development credits Stock option expense Other Gross Deferred Tax Asset Valuation allowance Net Deferred Tax Asset $ 23,609,594 403,498 3,415,143 1,462,065 $ 17,588,392 538,819 2,569,848 1,017,790 56,063 $ 28,946,363 103,235 $ 21,818,084 (28,946,363) (21,818,084)