6. Income Taxes
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act,” or TCJA, that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under TCJA the Company revalued its ending net deferred tax assets at December 31, 2017 and given we are still subject to a valuation allowance did not recognize any tax expense (related to such reduced tax rate) in the Company’s consolidated statement of income for the year ended December 31, 2017. However, the Company did provisionally recognize a $1.1 million tax benefit due to the release of the valuation allowance on its alternative minimum tax credit deferred tax asset as part of the TCJA. The TCJA repealed the corporate alternative minimum tax (AMT). Companies with AMT credit carryovers can generally use the credits to offset regular tax liability for any taxable year beginning in 2018. In addition, the AMT credit is refundable, subject to certain limitations, in any taxable year beginning after 2017. Lastly, any remaining AMT credit carryforward is fully refundable by 2022.
While the TCJA provide for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company may be subject to incremental U.S. tax on GILTI income in the future. The Company has elected to account for any GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.
The BEAT provisions eliminates the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax in 2018, but will continue to monitor. Therefore, the Company has not included any tax impacts of BEAT in its consolidated financial statements for the year ended December 31, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The Company has recognized the provisional tax impacts related to the release of the valuation allowance with respect to AMT credits and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. We continue to evaluate the effects of the TCJA and consider the amounts recorded to be provisional. Additional time is needed to ensure that we have fully analyzed and computed the tax effects of the 2017 Tax Act on our tax accounts. We will complete our accounting during the measurement period provided under SAB 118 as we obtain further clarity on the application of the TCJA to our particular facts and report appropriately in 2018.
Income (loss) before income taxes is as follows:
| 2017 | 2016 | 2015 | ||||||||||
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U.S. |
$ | (20,486,935 | ) | $ | (86,965,860 | ) | $ | (104,791,541 | ) | |||
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Non-U.S. |
(78,347,330 | ) | (28,394,735 | ) | — | |||||||
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Total loss before taxes |
(98,834,265 | ) | (115,360,595 | ) | $ | (104,791,541 | ) | |||||
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Total income tax (benefit) expense for the years ended December 31, 2017, 2016 and 2015 is allocated as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Current |
$ | (2,416 | ) | $ | 1,065,673 | $ | 1,600 | |||||
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Deferred |
13,713,987 | 19,605,520 | 51,165,859 | |||||||||
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Valuation allowance |
(14,772,422 | ) | (19,605,520 | ) | (51,165,859 | ) | ||||||
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(Benefit) provision for income taxes |
$ | (1,060,851 | ) | $ | 1,065,673 | $ | 1,600 | |||||
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A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate for the years ended December 31, 2017, 2016 and 2015 is as follows:
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Income tax benefit at statutory federal rate |
35.00 | % | 35.00 | % | 35.00 | % | ||||||
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Royalty Income |
0.00 | (37.93 | ) | 0.00 | ||||||||
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Other Permanent differences |
(0.43 | ) | (0.78 | ) | (0.56 | ) | ||||||
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Foreign rate differential |
(27.75 | ) | (8.61 | ) | 0.00 | |||||||
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2017 US Tax Reform impact |
(21.89 | ) | (0.03 | ) | 0.00 | |||||||
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R&D Credit |
(0.05 | ) | 2.11 | 4.19 | ||||||||
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Change in effective state tax rates |
0.84 | (6.98 | ) | (0.05 | ) | |||||||
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State income tax expense |
0.40 | (0.70 | ) | 10.24 | ||||||||
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Change in valuation allowance |
14.95 | 16.99 | (48.82 | ) | ||||||||
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Benefit (provision) for income taxes |
1.07 | % | (0.93 | )% | (0.00 | )% | ||||||
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Deferred income taxes reflect the net tax effect of temporary differences that exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. As of December 31, 2017, the Company had $131.1 million of federal net operating loss carryforwards, which expire at various dates through 2035. The gross amount of the state net operating loss carryforwards is equal to or less than the federal net operating loss carryforwards and expires over various periods based on individual state tax law. In general, businesses with U.S. net operating losses (“NOLs”) are considered loss corporations for U.S. federal income tax purposes. Pursuant to Section 382 of the Code, loss corporations that undergo an ownership change, as defined under the Code, may be subject to an annual limitation on the amount of NOLs (and certain other tax attributes) available to offset taxable income earned after such ownership change. For the year ended December 31, 2017, the Company performed a Section 382 ownership analysis and determined that an ownership change occurred (within the meaning of Section 382 of the Code) in 2015 but not in subsequent periods. Based on the analysis performed, however, the Company does not believe that the Section 382 annual limitation will impact the Company’s ability to utilize the tax attributes that existed as of the date of the ownership change in a material manner. If the Company experiences an ownership change in the future, the tax benefits related to the NOLs and tax credit carryforwards may be further limited or lost.
In September 2016, the Company licensed certain intellectual property rights to its wholly-owned subsidiary, ITI Limited, which was formed in the third quarter of 2016. The costs to develop, test, manufacture and perform other activities related to the lumateperone (also known as ITI-007)program will be the responsibility of ITI Limited and will be incurred outside of the United States. Therefore, the majority of expected losses incurred by the Company during the next several years will not result in additional NOLs to be carried forward and used against future net income in the U.S. The following summarizes the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016, respectively:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Net operating loss carryforwards |
$ | 40,746,589 | $ | 49,627,652 | ||||
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Accrued employee benefits |
378,058 | 535,158 | ||||||
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Research and development credit |
9,321,214 | 9,367,227 | ||||||
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Stock compensation |
8,711,721 | 9,360,025 | ||||||
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Federal AMT credit |
1,058,435 | 1,062,451 | ||||||
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Deferred rent |
699,560 | 1,095,220 | ||||||
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Unrealized comprehensive loss |
187,714 | — | ||||||
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Deferred tax liabilities: |
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Depreciation |
(31,796 | ) | (44,732 | ) | ||||
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Net deferred tax asset |
61,071,495 | 71,003,001 | ||||||
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Valuation allowance |
(60,013,060 | ) | (71,003,001 | ) | ||||
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Net deferred tax asset |
$ | 1,058,435 | $ | — | ||||
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Based upon the Company’s historical operating performance and the reported cumulative net losses to date, the Company presently does not have sufficient objective evidence to support the recovery of its net deferred tax assets. Accordingly, the Company has established a full valuation allowance against its net deferred tax assets, excluding the refundable alternative minimum tax credit in 2017, for financial reporting purposes because it is not more likely than not that these deferred tax assets will be realized.
The total amount of unrecognized tax benefits as of December 31, 2017 and December 31, 2016 were $1.7 million and $1.7 million, respectively. If recognized none of these tax benefits would affect the effective tax rate due to valuation allowances.
The following summarizes the significant components of gross unrecognized tax benefits as of December 31, 2017 and 2016, respectively:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Balance at January 1, |
$ | 1,738,815 | $ | 1,720,912 | ||||
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Current Year Uncertain Tax Positions: |
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Gross Increases |
— | 17,903 | ||||||
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Balance at December 31, |
$ | 1,738,815 | $ | 1,738,815 | ||||
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