8.  Income Taxes



U.S. Tax Reform

On December 22, 2017, legislation commonly known as the Tax Cuts and Jobs Act, or the Act, was signed in to law. The Tax Act, among other changes, reduces the U.S. federal corporate tax rate from 35% to 21%, requires taxpayers to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  On December 31, 2017, the Company did not have any foreign subsidiaries and the international aspects of the Tax Act are not applicable.

In connection with the initial analysis of the impact of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company's deferred tax balance was primarily offset by application of its valuation allowance.      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.

 

We did not provide for income taxes in 2017 and 2016 because we had a net operating loss for tax purposes in those years and the tax benefit that would have resulted from the statutory rate was fully offset by the valuation allowance.



Deferred tax assets and valuation allowance



Deferred tax assets reflect the tax effects of net operating loss and tax credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We reduced our deferred taxes assets at December 31, 2017 for the reduced corporate tax rate to 21% in recently enacted tax legislations.  We offset our deferred tax assets by a valuation allowance because we are uncertain about the timing and amount of any future profits. Significant components of our deferred tax assets are as follows (in thousands):





As of the beginning of 2017, we increased both our net operating loss carryforwards and our valuation allowance by $0.9 million when we adopted ASU 2016-09 for certain tax deductions associated with stock option transactions greater than the stock-related compensation expense in our financial statements. The valuation allowance decreased by $10.3 million in 2017 and increased by $3.6 million in 2016.



Our pre-tax net operating loss carryforwards of $74 million are federal and expire between 2029 and 2036. As of December 31, 2017, we had federal research and development tax credits of approximately $10.7 million, which expire in the years 2023 through 2036.  



Unrecognized tax benefits



We have unrecognized tax benefits related to tax credits. We added to our unrecognized tax benefits in 2017 and 2016 as follows (in thousands):