Income Taxes
The Company provides for income taxes under ASC 740. Under ASC 740, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law. The Tax Act, among other changes, permanently lowers the corporate federal tax rate to 21% from the existing maximum rate of 35%, effective for tax years beginning January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, US GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of the enactment. This revaluation resulted in a provision of $59.3 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance. As a result, there was no impact on the Company's consolidated statements of operations from the reduction in the tax rate. The other provisions of the Tax Act did not have a material impact on the consolidated financial statements.
The Company is still in the process of analyzing the impact to the Company of the Tax Act. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the Tax Act.
Deferred tax assets and valuation allowance
For the years ended December 31, 2017, 2016 and 2015, the Company recorded current income tax expense of $32,000, $24,000, and zero, respectively, related to state income taxes on its interest income.
The Company's loss before income taxes was $108.4 million, $57.0 million and $63.9 million for the years ended December 31, 2017, 2016 and 2015, respectively, and was generated entirely in the United States.
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company's deferred tax assets are comprised of the following (in thousands):
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
|
U.S. and state net operating loss carryforwards | $ | 116,812 |
| | $ | 109,429 |
|
Research and development credits | 12,548 |
| | 9,717 |
|
Deferred revenue | 1,010 |
| | 1,666 |
|
Accruals and other temporary differences | 15,287 |
| | 15,725 |
|
Total deferred tax assets | 145,657 |
| | 136,537 |
|
Less valuation allowance | (145,657 | ) | | (136,537 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company's history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2017 and 2016. The valuation allowance increased by $9.1 million, $26.7 million, and $20.0 million during the years ended December 31, 2017, 2016, and 2015, respectively, due primarily to the generation of net operating losses during the period.
A reconciliation of income tax expense computed at the statutory federal income tax rate to income taxes as reflected in the consolidated financial statements is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal income tax expense at statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State income tax, net of federal benefit | 5.6 | % | | 5.9 | % | | 4.6 | % |
Permanent differences | 1.9 | % | | 4.0 | % | | (8.3 | )% |
Research and development credit | 1.9 | % | | 3.1 | % | | 1.2 | % |
Tax reform rate change | (54.7 | )% | | — | % | | — | % |
Other | (0.3 | )% | | (0.1 | )% | | — | % |
Change in valuation allowance | 11.6 | % | | (46.9 | )% | | (31.5 | )% |
Effective income tax rate | — | % | | — | % | | — | % |
As of December 31, 2017 and 2016, the Company had U.S. federal net operating loss carryforwards of $438.0 million and $339.3 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037. As of December 31, 2017 and 2016, the Company also had U.S. state net operating loss carryforwards of $393.6 million and $293.7 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037.
As of December 31, 2017 and 2016, the Company had federal research and development tax credit carryforwards of $8.1 million and $6.7 million, respectively, available to reduce future tax liabilities which expire at various dates through 2037. As of December 31, 2017 and 2016, the Company had state research and development tax credit carryforwards of approximately $5.6 million and $4.5 million, respectively, available to reduce future tax liabilities which expire at various dates through 2032.
Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three‑year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future. The Company has completed an assessment through December 31, 2017 to determine whether there may have been a Section 382 ownership change and determined that it is more-likely-than-not that the Company’s net operating and tax credit amounts as disclosed are not subject to any material Section 382 limitations.
The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company's consolidated statements of operations and comprehensive loss.
For all years through December 31, 2017, the Company generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position for the years ended December 31, 2017 and 2016. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.
The Company files income tax returns in the United States, and various state jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2014 through December 31, 2017. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state taxing authorities to the extent utilized in a future period.