Income Taxes
The components of our (provision for) benefit from income taxes is as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | (1,304 | ) | | $ | (1,175 | ) | | $ | — |
|
State | (2,409 | ) | | (919 | ) | | (3 | ) |
| $ | (3,713 | ) | | $ | (2,094 | ) | | $ | (3 | ) |
Deferred: | | | | | |
Federal | (18,045 | ) | | 29,553 |
| | — |
|
State | 756 |
| | 567 |
| | — |
|
| $ | (17,289 | ) | | $ | 30,120 |
| | $ | — |
|
| | | | | |
(Provision for) benefit from income taxes | $ | (21,002 | ) | | $ | 28,026 |
| | $ | (3 | ) |
The table below provides reconciliation between the statutory federal income tax rate and the effective rate of income tax expense for each of the periods shown as follows. For periods with a loss before benefit for income taxes, favorable tax items result in an increase in the effective tax rate, while unfavorable tax items result in a decrease in the effective tax rate. For periods with income before provision for income taxes, favorable tax items result in an decrease in the effective tax rate, while, unfavorable tax items result in an increase in the effective tax rate.
|
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Federal statutory tax rate | | 35 | % | | 35 | % | | 34 | % |
State income taxes, net of federal benefit | | 3 | % | | 3 | % | | — | % |
Tax benefit on stock option exercises | | (4 | )% | | (7 | )% | | — | % |
Tax credits | | (10 | )% | | (3 | )% | | (10 | )% |
Other | | — | % | | (1 | )% | | 1 | % |
Revaluation of net deferred tax assets due to U.S. tax reform | | 5 | % | | N/A |
| | N/A |
|
Change in valuation allowance | | — | % | | (79 | )% | | (25 | )% |
Effective tax rate | | 29 | % |
| (52 | )% |
| — | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets were as follows:
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Deferred tax assets | | | | |
Net operating loss carryforward | | $ | 151 |
| | $ | 17,700 |
|
Stock based compensation | | 6,454 |
| | 5,185 |
|
Research and development and other tax credit carryforwards | | 5,190 |
| | 4,993 |
|
Accrued bonus and other employee-related expenses | | 240 |
| | 1,946 |
|
Prepaid R&D expenses | | 964 |
| | 1,643 |
|
Other | | 1,405 |
| | 285 |
|
Total deferred tax assets | | 14,404 |
| | 31,752 |
|
Deferred tax liabilities | | | | |
Intangible assets | | 1,655 |
| | 2,944 |
|
Prepaid expenses | | 28 |
| | 80 |
|
Fixed assets | | 1,172 |
| | 78 |
|
Other | | 195 |
| | 7 |
|
Total deferred tax liabilities | | 3,050 |
| | 3,109 |
|
Valuation allowance | | — |
| | — |
|
Net deferred tax assets | | $ | 11,354 |
|
| $ | 28,643 |
|
The recently enacted Tax Cuts and Jobs Act (the “Tax Act”) significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21% and implementing a modified territorial tax system. In response to the Tax Act, the SEC issued SAB 118 which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements and adjust in the period in which the estimate becomes finalized, or in circumstances where estimates cannot be made, to disclose and recognize within a one year measurement period.
Implementation of the Tax Act resulted in an approximate $3.4 million charge for the revaluation of the Company’s net deferred tax assets during the year ended December 31, 2017. In reaching these estimates, the Company utilized all available guidance and notices issued by the U.S. Department of the Treasury. These amounts are to be considered provisional and are not currently able to be finalized given the complexity of the underlying calculations. The Company will update and conclude its accounting as additional information is obtained, which is contingent on the timing of issuance of regulatory guidance.
As a result of recently attaining profitability and the expectation that substantially all net operating loss carryforwards would be utilized in 2017, the Company engaged a third party provider to perform a formal tax evaluation to determine maximum research and development credits that are available based on current law. This project resulted in the engagement of professional technical experts and the investment of significant time to evaluate historical records to identify the maximum credits as permitted by the relevant tax law. This project was concluded in the connection with the preparation of the current year financial statements. As a result of the evaluation of historical records and data, our tax filings, and various tax law interpretations related to the R&D credit availability, additional tax credits were determined. The Company considers the additional credits to result from new information that was not feasibly knowable before the commencement of a formal study, and the results are recorded in the current year as a change in accounting estimate. The adjustment recorded was an increase in tax credits of $5.5 million and a reduction of income tax expense.
In the year ended December 31, 2016, we released a previously carried tax valuation allowance on our net deferred tax assets including net operating loss carryforwards and the tax benefit related to the exercises of stock options. Our decision to remove the valuation allowance on the Company's net deferred tax assets considered our significant income in 2016 which translated to our becoming a tax payer in 2016 and our outlook on prospective earnings and taxable income driven by Bendeka royalty and milestone revenues.
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $0.7 million and $1.0 million. The Company also had a federal research and development tax credit carryforward of approximately $4.0 million. The net operating loss and tax credit carryforwards will expire at various times through 2035.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued ASC 740-10, Uncertainty in Income Taxes, which defines the threshold for recognizing the benefits of tax-return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authorities. This statement also requires explicit disclosure requirements about a Company’s uncertainties related to their income tax position, including a detailed roll forward of tax benefits taken that do not qualify for financial statement recognition.
The Company files income tax returns in the U.S. federal jurisdiction and several states. Given that the company has incurred tax losses since its inception, all of the Company’s tax years are effectively open to examination. The Company has no amount recorded for any unrecognized tax benefits as of December 31, 2017. The Company regularly evaluates its tax positions for additional unrecognized tax benefits and associated interest and penalties, if applicable. There are many factors that are considered when evaluating these tax positions including: interpretation of tax laws, recent tax litigation on a position, past audit or examination history, and subjective estimates and assumptions.