12. INCOME TAXES
The Company is subject to income taxes in the United States as well as certain state tax jurisdictions. The Company provides for income taxes under the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Due to its operating losses, the Company has not recorded a current or deferred income tax expense or benefit since its inception. A reconciliation of the statutory federal income tax provision to the actual income tax provision is as follows (in thousands):
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
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Expected income tax benefit at federal statutory rate |
$ | (35,237 | ) | $ | (31,436 | ) | $ | (13,597 | ) | |||
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State income tax benefit, net of federal benefit |
(2,837 | ) | (5,438 | ) | (2,245 | ) | ||||||
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Research credits |
(3,480 | ) | (1,854 | ) | (1,118 | ) | ||||||
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Intangible related to asset acquisition |
— | (1,247 | ) | — | ||||||||
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Uncertain tax positions |
3,476 | 1,386 | — | |||||||||
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Other |
812 | 13 | 162 | |||||||||
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Change in valuation allowance |
37,266 | 38,576 | 16,798 | |||||||||
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Income tax expense (benefit) |
$ | — | $ | — | $ | — | ||||||
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Included in the balance of unrecognized tax benefits at December 31, 2016 is $4.8 million that, if recognized, would not impact our income tax benefit or effective tax rate as long as our deferred tax asset remains subject to a full valuation allowance. We do not expect any significant increases or decreases to our unrecognized tax benefits within the next 12 months. The following table summarizes the changes in the amount of the Company’s unrecognized tax benefits (in thousands):
| Year ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
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Beginning balance |
$ | 2,100 | $ | — | $ | — | ||||||
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Increase (decrease) for prior year tax positions |
5,267 | 2,100 | — | |||||||||
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Increase (decrease) for current year tax positions |
— | — | — | |||||||||
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Income tax expense (benefit) |
$ | 7,367 | $ | 2,100 | $ | — | ||||||
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Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the Company’s net deferred tax asset has been fully offset by a valuation allowance. The significant components of the Company’s deferred tax assets are comprised of the following (in thousands):
| December 31, | ||||||||
| 2016 | 2015 | |||||||
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Net operating loss carryforwards |
$ | 68,427 | $ | 35,131 | ||||
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Tax credit carryforwards |
6,571 | 3,224 | ||||||
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Stock-based compensation |
5,104 | 2,848 | ||||||
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Accrued compensation |
1,295 | 1,485 | ||||||
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Intangible assets recognized for tax purposes |
11,856 | 13,143 | ||||||
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In process research and development charge |
5,376 | 5,865 | ||||||
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Other, net |
680 | 846 | ||||||
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Total deferred tax assets |
99,309 | 62,542 | ||||||
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Deferred tax liabilities (depreciation) |
(610 | ) | (1,060 | ) | ||||
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Valuation allowance |
(98,699 | ) | (61,482 | ) | ||||
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Net deferred tax assets |
$ | — | $ | — | ||||
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At December 31, 2016, the Company had unused federal and state net operating loss (“NOL”) carryforwards of $192.3 million and $138.8 million, respectively, which will begin to expire in 2031. Approximately $1.0 million of these carryforwards relate to excess tax deductions for stock compensation, the benefit of which will be recorded as additional paid-in capital if and when realized. At December 31, 2016, the Company also had federal and state research tax credit carryforwards of $4.4 million and $3.3 million, respectively. The federal carryforwards begin to expire in 2031, while the state carryforwards have no expiration.
The utilization of NOL and tax credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that have occurred previously or may occur in the future. Under Sections 382 and 383 of the Internal Revenue Code (“IRC”), a corporation that undergoes an “ownership change” may be subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes otherwise available to offset future taxable income and/or tax liability. An ownership change is defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company has not completed a formal study to determine if any ownership changes within the meaning of IRC Section 382 and 383 have occurred. If an ownership change has occurred, the Company’s ability to use its NOL or tax credit carryforwards may be restricted, which could require the Company to pay federal or state income taxes earlier than would be required if such limitations were not in effect.
The Company conducts intensive research and experimentation activities, generating research tax credits for Federal and state purposes under IRC section 41. The Company has not performed a formal study validating these credits claimed in the tax returns. Once a study is prepared, the amount of R&D tax credits available could vary from what was originally claimed on the tax returns.
While the Company is not currently under any tax related examination, the tax years from 2012 through 2016 remain subject to examination by the taxing jurisdictions to which the Company is subject. The Company may be assessed interest and penalties related to the settlement of tax positions, and such amounts would be recognized within income tax expense when assessed.