Cascadian Therapeutics, Inc.

10 .	INCOME TAX

The provision (benefit) for income taxes consists of the following:

	2017		2016			2015
	(In thousands)
Current income tax expense (benefit)	$	—	$	—		$	—
Deferred income tax expense (benefit)		—		(6,908	)		—
Total income tax expense (benefit)	$	—	$	(6,908	)	$	—

The Company recorded an income tax benefit of

$6.9

million in

2016

due to the reversal of its deferred tax liability, which related solely to the impairment of the indefinite-lived intangible asset.

Tax Reform

The Tax Cuts and Jobs Act (“U.S. Tax Act”) was enacted on

December 22, 2017.

December 31, 2017,

the Company has

not

completed accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances.

In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, its estimates

may

also be affected as the Company gains a more thorough understanding of the tax law.

The

U.S. Tax Act reduces the U.S. federal corporate tax rate from

35%

21%

beginning in

2018.

The impact of the U.S. Tax Act for the Company is estimated to be a

$50.1

million reduction in the Company's net deferred tax assets to reflect the new statutory rate at which they are expected to reverse. The rate adjustment to the net deferred tax assets is a component of income tax expense and is fully offset by a decrease in the valuation allowance so there is

impact to the Company’s total tax expense.

Starting in

2018,

companies

may

be subject to global intangible low tax income (

“GILTI”) which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations as well as the new base erosion anti-abuse tax (“BEAT”) under the TCJA. GILTI will be effectively taxed at a tax rate of

10.5%.

Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (

) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (

) factoring such amounts into a company’s measurement of its deferred taxes under the SAB

118.

The Company has

not

yet made an election with respect to GILTI. The Company will continue to review the GILTI and BEAT rules to determine their applicability to the company as the rules become effective.

The provision for income taxes was different from the expected statutory federal income tax rate as follows:

	2017			2016			201 5
Tax benefit at statutory rate		35.0	%		35.0	%		35.0	%
Change in fair value of warrant liability		0.0			0.0			0.1
Stock based compensation		(1.6	)		(0.9	)		0.8
Other		0.0			0.4			0.4
Tax law changes		(88.1	)		0.0			0.0
Change in valuation allowance		54.7			(23.7	)		(40.0	)
Net operating loss expiration and true ups		0.0			0.0			3.7
Income tax benefit (provision)		0.0	%		10.8	%		0.0	%

The Company

’s net deferred tax assets and deferred tax liabilities were recorded in other assets and accrued and other liabilities, respectively on the Consolidated Balance Sheets and consist of the following as of

December

31,

2017

and

2016:

	2017			201 6
	(In thousands)
Deferred tax assets
Accrued expenses and other	$	623		$	1,510
Tax benefits from losses carried forward and tax credits		126,552			147,001
Stock based compensation		2,547			4,119
Intangible assets		5,312			9,776
Other		242			207
Total deferred tax assets	$	135,276		$	162,613
Valuation allowance		(135,180	)		(162,414	)
Net deferred tax assets		96			199


Deferred tax liabilities
Prepaid expenses		96			199
Intangible asset		—			—
Total deferred tax liabilities		96			199
Net deferred tax liability	$	—		$	—

Based on the available evidence, the Company has recorded a full valuation allowance against its net deferred income tax assets as it is more likely

than

not

that the benefit of these deferred tax assets will

not

be realized. The valuation allowance decreased by

$27.2

million and increased by

$17.0

million during the years ended

December

31,

2017

and

December 31, 2016,

respectively.

The Company has recorded the following reserve

for uncertain tax positions as of

December 31, 2017,

2016

and

2015:

	201 7		2016		2015
	(In thousands)
Balance at January 1	$	662	$	662	$	545
Increase related to prior year tax positions						117
Decrease related to current year tax positions		—		—		—
Lapses of statute of limitations		—		—		—
Balance at December 31	$	662	$	662	$	662

None

of the unrecognized tax benefits that, if recognized, would affect the effective tax rate due to valuation allowance. We are currently

not

under audit by the federal, state and foreign tax authorities. We do

not

believe that it is reasonably possible that the total amounts of unrecognized tax benefit will materially increase or decrease within the next

months.

United States

The Company has accumulated

net operating losses of

$317.1

million and

$260.0

million for United States federal tax purposes at

December

31,

2017

and

2016,

respectively, some of which are restricted pursuant to Section

382

of the Internal Revenue Code, and which

may

not

be available entirely for use in future years. These losses expire in fiscal years

2018

through

2037.

The Company has federal research and development tax credit carryforwards of

$0.7

million that will expire in fiscal years

2018

through

2029,

not

utilized.

Canada

The Company has unclaimed

Canada federal investment tax credits of

$16.2

million and

$15.2

million at

December

31,

2017

and

2016,

respectively, that expire in fiscal years

2018

through

2028.

The Company has scientific research & experimental development expenditures of

$109.1

million and

$102.1

million for Canada federal purposes and

$47.8

million and

$44.7

million for provincial purposes at

December

31,

2017

and

2016,

respectively. These expenditures

may

be utilized in any period and

may

be carried forward indefinitely. The Company also has Canada federal capital losses of

$150.2

million and

$140.6

million and provincial capital losses of

$150.3

million and

$140.7

million at

December

31,

2017

and

2016,

respectively, which can be carried forward indefinitely to offset future capital gains. The Company has accumulated net operating losses of

$5.2

million and

$4.8

million at

December

31,

2017

and

2016

for Canada federal tax purposes and

$3.4

million and

$3.1

million at

December

31,

2017

and

2016

for provincial purposes which expire between

2026

and

2036.

The Company is subject to examination by the Canada Revenue Agency for years after

2008.

However, carryforward attributes that were generated prior to

2008

may

still be adjusted by a taxing authority upon examination if the attributes have been or will be used in a future period.

Australia

The Company formed an Australian entity in late

2017.

The Australian entity has accumulated net operating losses of

$0.2

million at

December 31, 2017.

A full valuation allowance has been recorded against its net deferred income tax assets.

Other

The Company files federal and foreign income tax returns in the United States and abroad. For U.S. federal income tax purposes, the statute of limitations is open for

1998

and onward for the United States and Canada due to net operating loss carried forwards.

ASU

2016

2017,

the Company adopted ASU

2016

Stock Compensation: Improvements to Employee Share-Based Payment Accounting. As a result, the net operating loss deferred tax asset has increased by

,000

as a result of the inclusion of the net operating losses related to excess tax benefits. The increase in the deferred tax asset was offset by a full valuation allowance.