H. Income Taxes
At December 31, 2017, we had U.S. federal net operating loss and research and development tax credit carryforwards of approximately $136.6 million and $7.3 million, respectively. Such operating losses and tax credits may be used to reduce future taxable income and tax liabilities and will expire at various dates between 2021 and 2037. We also had foreign net operating loss carryforwards of approximately $19.9 million. Such foreign net operating loss carryforwards do not expire. We also had state and city net operating loss carryforwards aggregating approximately $69.4 million. Such operating losses may be used to reduce future taxable income and tax liabilities and will expire at various dates between 2018 and 2037.
The utilization of net operating loss and tax credit carryforwards generated prior to October 2012 (the “Section 382 Limited Attributes”) is substantially limited under Section 382 of the Internal Revenue Code of 1986, as amended, (the “IRC”) as a result of our equity offering that occurred in October 2012. We generated U.S. federal net operating loss carryforwards of $99.9 million, research and development tax credits of $7.3 million, and state and local net operating loss carryforwards of $69.4 million since 2012. We will update our analysis under Section 382 prior to using these attributes.
A reconciliation of the Federal statutory income tax rate to our effective tax rate is as follows:
| Percent of Income before Income Taxes |
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| 2017 | 2016 | |||||||
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Statutory Federal income tax rate |
34.0 | % | 34.0 | % | ||||
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State income taxes - net of Federal tax benefit |
0.8 | % | 0.8 | % | ||||
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Other permanent differences |
(5.5 | %) | (8.1 | %) | ||||
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Valuation allowances |
24.1 | % | (37.0 | %) | ||||
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Federal rate change |
(57.9 | %) | 0.0 | % | ||||
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Research and development - U.S. |
4.5 | % | 10.3 | % | ||||
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Research and development - Foreign |
0.0 | % | 0.2 | % | ||||
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Effective tax rate for the year |
0.0 | % | 0.2 | % | ||||
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Significant components of our deferred tax assets are as follows (in thousands):
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Net operating loss carryforwards |
$ | 35,409 | $ | 44,929 | ||||
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Research and development credit carryforwards |
7,301 | 6,017 | ||||||
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Compensation expense |
652 | 2,735 | ||||||
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Other |
1,467 | 1,266 | ||||||
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Total deferred tax assets |
44,829 | 54,947 | ||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Valuation allowance for deferred tax assets |
(44,829 | ) | (54,772 | ) | ||||
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Net deferred tax assets |
$ | — | $ | 175 | ||||
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Because of our cumulative losses, substantially all of the deferred tax assets have been fully offset by a valuation allowance. We have not paid income taxes for the three-year period ended December 31, 2017.
On December 22, 2017, the U.S. federal government enacted legislation commonly referred to as the “Tax Cuts and Jobs Act” (the “TCJA”). The TCJA makes widespread changes to the IRC, including, among other items, a reduction in the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The carrying value of our deferred tax assets and liabilities is also determined by the enacted U.S. corporate income tax rate. Consequently, any changes in the U.S. corporate income tax rate will impact the carrying value of our deferred tax assets and liabilities. Under the new corporate income tax rate of 21%, deferred income tax assets, net, have provisionally decreased by $18.7 million and the valuation allowance has had a corresponding decrease. The Deemed Repatriation Transition Tax (Transition Tax) is a tax on previously untaxed accumulated and current earnings and profit (E&P) of certain of our foreign subsidiaries. To determine the amount of Transition Tax, a company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant foreign subsidiaries as well as the amount of non-U.S. income tax paid on such earnings. The Company believes it has an overall foreign E&P deficit and accordingly has not recorded any provisional Transition Tax obligation as of December 31, 2017. However, the Company is continuing to gather additional information to finalize its Transition Tax liability.
We determined that the provisional calculations will be finalized after the underlying timing differences and foreign earnings and profits are finalized with our 2017 federal tax return filing. Furthermore, we are still analyzing certain aspects of the TCJA and refining our calculations which could potentially affect the measurement of these balances or potentially give rise to new or additional deferred tax amounts. We will consider additional guidance from the U.S. Treasury Department, IRS or other standard-setting bodies. Further adjustments, if any, will be recorded by us during the measurement period in 2018, as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.