19. Income Taxes
We file income tax returns in the U.S., Italy and the U.K. A substantial part of our operations takes place in the State of Washington, which does not impose an income tax as that term is defined in ASC 740, Accounting for Income Taxes. As such, our state income tax expense or benefit, if recognized, would be immaterial to our operations. We are not currently under examination by an income tax authority, nor have we been notified that an examination is contemplated.
The U.S. signed into law, on December 22, 2017, tax reform legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017, or the 2017 Tax Act. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhances and extends through 2026 the option to claim accelerated depreciation deductions on qualified property. We have completed our determination of the accounting implications of the 2017 Tax Act, the impact of which is a $41.3 million reduction in net deferred tax assets to reflect the new statutory rate. The rate adjustment to deferred tax assets, a discrete item for the quarter, is fully offset by a decrease in the valuation allowance: there is therefore no rate impact to us. In addition, there is no impact to current or deferred taxes related to the one-time deemed repatriation, as our foreign subsidiaries do not have cumulative positive earnings and profits.
Loss before income taxes is attributable to the following tax jurisdictions (in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
United States | $ | (40,180 | ) | | $ | (51,856 | ) | | $ | (110,831 | ) |
Foreign | (651 | ) | | (1,097 | ) | | (9,932 | ) |
Net loss before income taxes | $ | (40,831 | ) | | $ | (52,953 | ) | | $ | (120,763 | ) |
The reconciliation between our effective tax rate and the income tax rate as of December 31 is as follows:
|
| | | | | | | | |
| 2017 | | 2016 | | 2015 |
Federal income tax rate | 34 | % | | 34 | % | | 34 | % |
Research and development tax credits | 3 |
| | 1 |
| | 3 |
|
Non-deductible executive compensation | — |
| | — |
| | (1 | ) |
Valuation allowance | 304 |
| | (33 | ) | | (32 | ) |
Foreign tax rate differential | — |
| | — |
| | (3 | ) |
Impact of tax reform | (101 | ) | | — |
| | — |
|
Expired tax attribute carryforwards | (240 | ) | | — |
| | — |
|
Other | — |
| | (2 | ) | | (1 | ) |
Net effective tax rate | — | % | | — | % | | — | % |
The principal components of our deferred tax assets and liabilities were as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | |
| | |
|
Net operating loss carryforwards | $ | 21,005 |
| | $ | 108,372 |
|
Capitalized research and development | 27,540 |
| | 43,768 |
|
Research and development tax credit carryforwards | 1,347 |
| | 7,253 |
|
Stock-based compensation | 12,842 |
| | 19,288 |
|
Intangible assets | 8,117 |
| | 14,525 |
|
Depreciation and amortization | 472 |
| | 626 |
|
Other deferred tax assets | 2,279 |
| | 3,721 |
|
Total deferred tax assets | 73,602 |
| | 197,553 |
|
Less: valuation allowance | (73,310 | ) | | (197,131 | ) |
| 292 |
| | 422 |
|
Deferred tax liabilities: | |
| | |
|
Deductions for tax in excess of financial statements | (292 | ) | | (422 | ) |
Total deferred tax liabilities | (292 | ) | | (422 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
As of December 31, 2017 and 2016, we had U.S. federal net operating loss carryforwards, or the NOL, of approximately $74.8 million and $305.4 million respectively, which are available to reduce future taxable income. We also had U.S. federal tax credits of $1.3 million and $7.3 million as of December 31, 2017 and 2016, respectively, which may be used to offset future tax liabilities. The NOL and tax credit carryforwards will begin to expire in 2018 and may become subject to 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%, as defined under Sections 382 and 383 of the Internal Revenue Code, or the IRC, of 1986, as amended. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or future tax liabilities. We have undertaken a formal IRC Section 382 study and the attributes disclosed in this footnote reflect the conclusion of that study. However, subsequent ownership changes may further affect the limitation in future years.
At December 31, 2017, the NOL carryforwards in the U.K.,which have an indefinite carryforward period, were approximately $31.2 million.
We maintain a full valuation allowance on our net deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In our valuation, we considered our cumulative loss in recent years and forecasted losses in the near term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, we determined that the negative evidence outweighed the positive evidence and that a full valuation allowance on our net deferred tax assets will be maintained. We will continue to assess the realizability of our deferred tax assets going forward and will adjust the valuation allowance as needed. Our valuation allowance decreased by $123.8 million during the year ended December 31, 2017, and increased by $23.2 million and $38.7 million during the years ended December 31, 2016 and 2015, respectively. The reduction in the valuation allowance for 2017 was attributable to the reduction in tax rate due to the 2017 Tax Act as well as the reduction in net operating losses as a result of the 2017 Section 382 analysis.
We adopted ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting, in 2017. Due to the fact that there was no excess tax benefit over book expense related to stock compensation, the adoption had no impact to the deferred tax assets.
We follow the provisions ASC 740, Accounting for Income Taxes, and the guidance related to accounting for uncertainty in income taxes. We determine our uncertain tax positions based on a determination of whether and how much of a tax benefit taken by us in our tax filings or positions is more likely than not to be sustained upon examination by the relevant income tax authorities. We are subject to U.S. federal and state, Italian and U.K. income taxes with varying statutes of limitations. Tax years from 1998 forward remain open to examination due to the carryover of net operating losses or tax credits. Our policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. As of December 31, 2017, we had no unrecognized tax benefits and therefore no accrued interest or penalties related to unrecognized tax benefits. We believe that our income tax filing positions reflected in the various tax returns are more-likely-than not to be sustained on audit and thus there are no anticipated adjustments that would result in a material change to our consolidated financial position, results of operations and cash flows. Therefore, no reserves for uncertain income tax positions have been recorded.