The income tax expense (benefit) consists of (in thousands):
| 2017 | 2016 | 2015 |
Current:
| | | | | | | | | |
Federal | $ | (5 | ) | $ | 2,400 | | $ | 806 | |
State | | 1,834 | | | 5,722 | | | 611 | |
| | 1,829 | | | 8,122 | | | 1,417 | |
| | | | | | | | | |
Deferred:
| | | | | | | | | |
Federal | | 9,029 | | | 37,377 | | | (2,275 | ) |
State | | (1,213 | ) | | (3,754 | ) | | (515 | ) |
| | 7,816 | | | 33,623 | | | (2,790 | ) |
Income tax expense (benefit) | $ | 9,645 | | $ | 41,745 | | $ | (1,373 | ) |
Income tax expense (benefit) differs from the amounts computed by applying the U.S. federal statutory tax rate as a result of the following (in thousands):
| 2017 | 2016 | 2015 |
Income tax at U.S. federal statutory tax rate | $ | 56,087 | | $ | 40,941 | | $ | (1,950 | ) |
State income tax, net of federal benefit | | 1,825 | | | 4,127 | | | (2 | ) |
Stock-based compensation | | (57,358 | ) | | 2,757 | | | 851 | |
Nondeductible items | | 1,181 | | | 485 | | | 902 | |
Research and development | | (6,418 | ) | | (1,963 | ) | | — | |
Uncertain tax positions | | 850 | | | (2,048 | ) | | 173 | |
Change in tax rate – other | | 614 | | | (781 | ) | | (1,471 | ) |
Change in tax rate – U.S tax reform | | 13,017 | | | — | | | — | |
Change in valuation allowance | | 410 | | | — | | | — | |
Other, net | | (563 | ) | | (1,773 | ) | | 124 | |
Income tax expense (benefit) | $ | 9,645 | | $ | 41,745 | | $ | (1,373 | ) |
The difference between the statutory federal income tax rate and the Company’s effective tax rate in 2017, 2016, and 2015 is primarily attributable to the effect of state income taxes, impact of tax reform, research and development tax credits, share-based compensation and other non-deductible permanent items.
The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities at December 31, 2017 and 2016 are presented below (in thousands):
| 2017 | 2016 |
Deferred tax assets:
| | | | | | |
Net operating loss carryforward | $ | 3,709 | | $ | 3,406 | |
Tax credit carryforwards | | 21,680 | | | 16,091 | |
Intangibles | | 5,534 | | | 12,891 | (1) |
Stock compensation | | 7,159 | | | 12,162 | |
Accruals | | 7,970 | | | 7,771 | |
Gross deferred tax assets | | 46,052 | | | 52,321 | |
Less: Valuation allowance | | (410 | ) | | — | |
Deferred tax assets, net of valuation allowance | | 45,642 | | | 52,321 | (1) |
Deferred tax liabilities:
| | | | | | |
Fixed assets | | (591 | ) | | (726 | ) |
Federal benefit of state tax deferred tax assets | | (1,903 | ) | | (2,813 | ) |
Gross deferred tax liabilities | | (2,494 | ) | | (3,539 | )(1) |
Deferred tax assets, net | $ | 43,148 | | $ | 48,782 |
| (1) | Reclassification of prior year presentation. |
As of December 31, 2017, we have approximately $43.1 million of net deferred tax assets. In assessing whether a valuation allowance was necessary, management considered all available positive and negative evidence, including our recent earnings trend, expected future income and the federal and state effective tax rates related to the future income. On the basis of this evaluation, we have recorded a valuation allowance of $410,000 against certain state research and development credits for which the Company believes it is more likely than not that the realization of these deferred tax assets will not be realized.
We have NOL carry-forwards of approximately $17.3 million for federal income tax purposes at December 31, 2017 which can be carried forward to offset future taxable income. Our federal NOLs will begin to expire in 2031. We do not have any material state NOL tax carry-forwards.
We have available tax credit carry-forwards of approximately $14.6 million and $7.1 million, net of unrecognized tax benefit for federal and state income tax purposes, respectively at December 31, 2017, which can be carried forward to offset future taxable liabilities. The federal tax credits begin to expire in 2019 and under California law, the California tax credits do not have an expiration date.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 (in thousands):
| Unrecognized
Tax Benefits |
Balance at December 31, 2014 | $ | (5,223 | ) |
Addition for tax positions of prior years | | (251 | ) |
Addition for tax position of the current year | | (560 | ) |
Settlement | | — | |
Balance at December 31, 2015 | $ | (6,034 | ) |
Additions for tax positions of prior years | | (810 | ) |
Reduction for tax positions of prior years | | 2,596 | |
Additions for tax position of the current year | | (2,156 | ) |
Settlement | | 251 | |
Balance at December 31, 2016 | $ | (6,153 | ) |
Additions for tax positions of prior years | | (293 | ) |
Reduction for tax positions of prior years | | 300 | |
Additions for tax position of the current year | | (3,504 | ) |
Balance at December 31, 2017 | $ | (9,650 | ) |
Included in the balance of unrecognized tax benefits as of December 31, 2017, 2016, and 2015, are $9.7 million, $6.2 million, and $6 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
Our policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. There was no material interest or penalty expense during the years ended December 31, 2017, 2016 and 2015. The Company does not expect any material changes in the amount of unrecognized tax benefits within the next twelve months.
We are subject to taxation in the U.S. and various state jurisdictions. We are subject to income tax examination by U.S. and state tax authorities for the calendar year ended December 31, 2014 and forward. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs and credits were generated and carried forward, and make adjustments up to the amount of the NOLs and credits utilized in open tax years.
The Tax Cuts and Jobs Act (Tax Reform Act), was enacted on December 22, 2017, which significantly changes the U.S. corporate income tax system by, among other things, effecting a Federal corporate rate reduction from 35% to 21%, includes limitations on certain deductions including executive compensation arrangements, reduces the maximum deduction of net operating loss with no carryback but indefinite carryforward provision, and repeals the corporate alternative minimum tax.
In connection with the Tax Reform Act, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts to the extent a reasonable estimate can be made. Additional tax effects and adjustments to previously recorded provisional amounts can be recorded upon obtaining, preparing, or analyzing additional information within one year from the enactment date of the Tax Reform Act. We have recorded a provisional reduction to our net deferred tax assets of $13 million, and a corresponding increase to income tax expense during the period related to the impact of the corporate income tax rate reduction. We have also analyzed the changes to the Section 162(m) limitations on performance-based compensation and have not recorded any adjustments in the provision. We are still awaiting further clarification on this portion of the new law. The estimated impact of the Tax Reform Act is subject to revision based upon further analysis and interpretation of the Tax Reform Act. We will continue to refine our estimates throughout the measurement period or until the accounting is complete, and the impact of the Tax Reform Act may differ from these estimates, possible materially, due to, among other things, changes in estimates and assumptions.