Income Taxes
As the Company has historically incurred net operating losses, the Company has not recorded a provision for income taxes. Deferred tax assets and liabilities reflect the net effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company maintains a full valuation allowance against its net deferred tax assets because significant utilization of such amounts is not presently expected in the foreseeable future.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation , the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017 including reducing the U.S. federal corporate tax rate to 21 percent. The following changes will affect 2018 (1) elimination of the corporate alternative minimum tax, or AMT, and changing how existing AMT credits can be realized; (2) a new limitation on deductible interest expense; (3) the repeal of the domestic production activity deduction; and (4) limitations on net operating losses , or NOLs, generated after December 31, 2017, to 80 percent of taxable income.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, Trevena has recorded a decrease related to deferred tax assets, or DTAs, and deferred tax liabilities, or DTLs, with a corresponding net adjustment to deferred income tax of expense of $42.0 million for the year ended December 31, 2017. This expense is offset fully by a change in the valuation allowance. The Company’s preliminary estimate of the Tax Act and the remeasurement of its deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act, changes to certain estimates and the filing of the Company’s tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in the Company’s estimates. The final determination of the Tax Act and the remeasurement of the Company’s deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Tax Act.
Significant components of the Company’s net deferred tax assets as of December 31, are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 16,042 |
| | $ | 15,748 |
|
Research and development credits | 12,239 |
| | 11,020 |
|
Research and development expenses capitalized for tax purposes | 83,707 |
| | 97,495 |
|
Deferred rent | 365 |
| | 97 |
|
Depreciation | 427 |
| | 553 |
|
Other temporary differences | 3,203 |
| | 1,895 |
|
Total deferred tax assets | 115,983 |
| | 126,808 |
|
Deferred tax liabilities: | | | |
Prepaid expenses | (65 | ) | | (105 | ) |
Total deferred tax liabilities | (65 | ) | | (105 | ) |
Net deferred tax assets | 115,918 |
| | 126,703 |
|
Less valuation allowance | (115,918 | ) | | (126,703 | ) |
Net deferred tax asset | $ | — |
| | $ | — |
|
A reconciliation of income tax expense computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is as follows:
|
| | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Percent of pre-tax income: | | | | | |
U.S. federal statutory income tax rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
Permanent Differences | 0.1 | % | | — | % | | 0.1 | % |
State taxes, net of federal benefit | 6.7 | % | | 6.6 | % | | 6.6 | % |
Research and development credit | 1.7 | % | | 4.0 | % | | 3.9 | % |
Rate change due to tax reform | (58.5 | )% | | — |
| | — |
|
Other | 1.0 | % | | — | % | | 0.3 | % |
Change in valuation allowance | 15.0 | % | | (44.6 | )% | | (44.9 | )% |
Effective income tax rate | — | % | | — | % | | — | % |
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $55.7 million and $4.4 million that begin to expire at various dates starting in 2027. As of December 31, 2017, the Company had federal research and development tax credit carryforwards of $12.2 million that begin to expire at various dates starting in 2027. The Company’s ability to utilize net operating loss carryforwards, or NOLs, or tax credit carryforwards may be subject to annual limitations under certain provisions of the Internal Revenue Code related to “changes in ownership.”
The Company files income tax returns in the U.S. and the Commonwealth of Pennsylvania. Tax years for fiscal 2014 through 2016 are open and potentially subject to examination by the federal and state taxing authorities. The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years. To the extent the Company utilizes in the future any tax attribute NOL carryforwards from a tax period that may otherwise be closed to examination, the Internal Revenue Service, state tax authorities, or other governing parties may still adjust the NOL carryforwards upon their examination of the future period in which the attribute was utilized.