ASC 740 requires that the tax benefit of net operating losses, temporary differences, and credit carryforwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. The Company has reviewed the positive and negative evidence relating to the realizability of the deferred tax assets and has concluded that the deferred tax assets are not more likely than not to be realized. The valuation allowance increased by approximately $877,000 and $690,000 during the years ended December 31, 2019 and 2018, respectively.

The difference between the effective tax rate and the U.S. federal tax rate is as follows:

Deferred tax assets and liabilities consist of the following:

As of December 31, 2019, Company had total federal net operating loss carryforwards of approximately $3,438,000, which will begin to expire in 2035. Losses generated after 2017 will be carried forward indefinitely. At December 31, 2019, the Company had state net operating loss carryforwards of approximately $259,000 which will begin to expire in 2027. The net operating loss related deferred tax assets do not include excess tax benefits from employee stock option exercises.

As of December 31, 2019, Company had R&D credit carryforwards of approximately $101,000 available to reduce future taxable income, if any, for state income tax purposes. Federal R&D credits are currently used to offset payroll taxes. The state R&D credit carryforwards expire beginning 2020.

The Tax Reform Act of 1986 limits the use of net operating carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be limited. The Company has not performed a net operating loss utilization study to date.

On January 1, 2015, the Company adopted the provisions of FASB Accounting Standards Codification (ASC 740-10), "Accounting for Uncertainty in Income Taxes." ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or are expected to be taken on a tax return. The cumulative effect of adopting ASC 740-10 resulted in no adjustment to retained earnings as of December 31, 2019. It is Company's policy to include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary.

No liability related to uncertain tax positions is recorded on the financial statements related to uncertain tax positions. There are no unrecognized tax benefits as of December 31, 2019. The Company does not expect that uncertain tax benefits will materially change in the next 12 months.

The Company files U.S. federal, California and Illinois State tax returns. Company is subject to California State minimum franchise taxes. All tax returns will remain open for examination by the federal and state taxing authorities for three and four years, respectively, from the date of utilization of any net operating loss carryforwards or R&D credits. In addition, due to the new operations in certain foreign countries, the Company became subject to local tax laws of such countries. Nonetheless, as of December 31, 2019, due to the insignificant expenditures in such countries, there was no material tax effect to the Company’s 2019 consolidated financial statements.