ENZON PHARMACEUTICALS, INC.

(11)

Income Taxes

The components of the income tax provision are summarized as follows (in thousands):

	Year Ended December 31,
	2017		2016
Current:
Federal	$	(1,801)	$	19
State and foreign		2		2
Total current		(1,799)		21
Deferred:
Federal and state		3,362		7,749

Income tax provision	$	1,563	$	7,770

The following table represents the reconciliation between the reported income taxes and the income taxes that would be computed by applying the federal statutory rate (35%) to income before taxes (in thousands):

	Year Ended December 31,
	2017		2016
Income tax provision at federal statutory rate	$	2,453	$	2,325
Add (deduct) effect of:
State income taxes, net of federal tax		970		621
Refundable AMT credit		(1,801)		-
Effect of tax rate change as a result of 2017 Tax Cuts and Jobs Act		16,869		-
Expiration of state tax credits		-		3,303
Expiration of stock options		-		2,144
Permanent difference		-		57
Change in valuation allowance		(14,549)		(680)
Recognition of windfall NOLs		(2,379)		-

Income tax provision	$	1,563	$	7,770

No federal income tax expense was incurred in relation to normal operating results due to the utilization of deferred tax assets.

As of December 31, 2017 and 2016, the tax effects of temporary differences that give rise to the deferred tax assets are as follows (in thousands):

	December 31,		December 31,
	2017		2016
Deferred tax assets:
Federal and state net operating loss carryforward	$	24,399	$	40,359
Research and development credits carryforward		16,608		16,608
Capital loss carryforwards		332		482
Federal alternative minimum tax credits		-		1,801
Total gross deferred tax assets		41,339		59,250
Less valuation allowance		(41,339)		(55,888)
Net deferred tax assets	$	-	$	3,362

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among its numerous changes to the Internal Revenue Code, the Act reduces the U.S. federal corporate tax rate from 35% to 21%. As a result, the Company believes that the most significant impact on its consolidated financial statements will be a reduction of approximately $16.9 million for the deferred tax assets related to net operating losses and other assets. Such reduction is offset by changes to the Company’s valuation allowance.

In addition, the Act repeals the corporate alternative minimum tax (“AMT”) for years beginning after December 31, 2017 and allows companies with existing alternative minimum tax credit (“MTC”) carryforwards as of December 31, 2017 to receive refunds of the credits in tax years after 2017 and before 2022 in an amount equal to 50% (100% in 2021) of the excess MTC over the amount of the credit allowable for the year against regular tax liability.

As of December 31, 2016, the Company had approximately $1.8 million in MTC for which it had recorded a full valuation allowance. The Company generated approximately $140,000 in additional MTC in 2017 as a result of the limitation on alternative minimum tax NOL carryforwards to offset 2017 alternative minimum tax. As a result of the Act’s provision allowing for the refund of MTC beginning in 2018, the Company has released the valuation allowance on the minimum tax credits. The Company has recorded this as a current benefit, recognized in 2017, as well as reclassification of the MTC as a long-term receivable of approximately $1.9 million. The Company has completed the accounting for the tax impact of the Act as of December 31, 2017 and has recorded no provisional amounts.

A valuation allowance is provided when it is more likely than not that some portion of all of the deferred tax assets will not be realized. Because the Company has projected little or no taxable income for the years 2018 through 2021, it is more likely than not that the deferred tax assets will not be realized.

At December 31, 2017, the Company had federal net operating loss carryforwards of approximately $106 million that expire in the years 2022 through 2031 and New Jersey state net operating loss carryforwards of approximately $29 million that expire in the years 2030 through 2031. The Company also has federal capital loss carryforwards of approximately $1.2 million that expire in 2018 and federal research and development tax credit carryforwards of approximately $16.6 million for tax reporting purposes that expire in the years 2018 through 2020. The Company’s ability to use the net operating loss and research and development tax credit carryforwards is subject to certain limitations due to ownership changes, as defined by rules pursuant to Section 382 of the Internal Revenue Code of 1986, as amended.