Income Taxes
The income tax provision (benefit) consists of the following (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | 10 |
| | 2 |
| | 2 |
|
Foreign | — |
| | — |
| | (15 | ) |
Total current provision | 10 |
| | 2 |
| | (13 | ) |
Deferred: | | | | | |
Federal | — |
| | — |
| | — |
|
State | — |
| | — |
| | — |
|
Foreign | — |
| | — |
| | — |
|
Total deferred provision | — |
| | — |
| | — |
|
Income tax provision (benefit) | $ | 10 |
| | $ | 2 |
| | $ | (13 | ) |
The difference between income tax benefits and income taxes computed using the U.S. federal income tax rate as of December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Federal provision (benefit) | | | | | |
At statutory rates | $ | (11,820 | ) | | $ | (6,959 | ) | | $ | (5,290 | ) |
State taxes, net of federal | — |
| | — |
| | 1 |
|
Change in valuation allowance | 11,830 |
| | 6,961 |
| | 5,291 |
|
Foreign operations | — |
| | — |
| | (15 | ) |
Income tax provision (benefit) | $ | 10 |
| | $ | 2 |
| | $ | (13 | ) |
Significant components of the Company’s deferred tax assets are as shown below:
|
| | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating losses | $ | 20,795 |
| | $ | 20,801 |
|
Tax credits | 3,747 |
| | 2,773 |
|
Capitalized research and development costs | 3,720 |
| | 5,279 |
|
Other | 1,808 |
| | 259 |
|
Total gross deferred tax assets | 30,070 |
| | 29,112 |
|
Less valuation allowance | (30,070 | ) | | (29,112 | ) |
Total deferred tax assets | $ | — |
| | $ | — |
|
A valuation allowance of $30.1 million and $29.1 million as of December 31, 2017 and 2016, respectively, has been established to offset the deferred tax assets as realization of such assets are uncertain.
At December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $88.8 million and $56.8 million, respectively. Each of the federal and state tax loss carryforwards will begin expiring in 2028, unless previously utilized. The Company also has federal and California research and development tax credit carryforwards totaling $2.1 million and $2.0 million, respectively. The federal research and development tax credit carryforward will begin to expire in 2028 unless previously utilized. The California research tax credits do not expire.
Pursuant to Internal Revenue Code, or IRC, Sections 382 and 383, annual use of the Company’s net operating loss and research and development credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company has not completed an IRC Section 382 and 383 analysis regarding the limitation of net operating loss and research and development credit carryforwards.
In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon an audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. As of December 31, 2017 and 2016, the Company had unrecognized tax benefits of $2.1 million and $0, respectively. There are no unrecognized tax benefits included on the consolidated balance sheet that would, if recognized, impact the effective tax rate, given the valuation allowance recorded against the deferred tax assets. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
|
| | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
Balance at January 1 | $ | — |
| | $ | — |
|
Additions based on tax positions related to current year | 449 |
| | — |
|
Additions based on tax positions related to prior years | 1,679 |
| | — |
|
Balance at December 31 | $ | 2,128 |
| | $ | — |
|
The Company is subject to taxation in the United States and various state jurisdictions. Due to the net operating loss carryforwards, the U.S. federal and state returns are open to examination for all years since inception. The Company has not been, nor is it currently, under examination by the federal or any state tax authority.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the "Act"). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018. As a result of the rate reduction, the Company has reduced the deferred tax asset balance as of December 31, 2017 by $13.3 million. Due to the Company's full valuation allowance position, the Company has also reduced the valuation allowance by the same amount. The accounting for the effects of the rate change on deferred tax balances is provisional and may be updated as further guidance regarding the Act becomes available and further analysis is performed.