We have incurred net operating losses since inception.
We have
not
reflected the benefit of net operating loss carryforwards in the accompanying financial statements and have established a full valuation allowance against our deferred tax assets.
Changes in tax laws and rates
may
affect recorded deferred tax assets and liabilities and our effective tax rate in the future. On
December 22, 2017
the Tax Cuts and Jobs Act
of
2017
(the “Tax Act”) became law. The Tax Act enacted significant tax law changes, largely effective for tax years beginning after
December 31, 2017.
The Tax Act reduces the corporate tax rate to
21%,
effective
January 1, 2018,
for all corporations. GAAP requires the effect of a change in tax laws or rates to be recognized as of the date of enactment, therefore we have revalued our deferred tax assets and liabilities as of
December 22, 2017.
As a result of the revaluation of our deferred tax assets and liabilities, we have reduced the value of our deferred tax asset and the related valuation allowance as of
December 31, 2017,
by
million.
At
December 31,
201
7
and
2016,
the Company had an income tax receivable of
$420,000
and
$321,000,
respectively, comprised of refundable tax incentives related to research and development activities of our subsidiary Sun BioPharma Australia Pty Ltd.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes
as well as operating losses and tax credit carryforwards.
The significant components of our deferred tax assets and liabilities are as follows (in thousands):
| | | | |
| | | | | | | |
Deferred tax assets (liabilities): | | | | | | | | |
| Net operating loss carryforwards | | $ | 3,440 | | | $ | 3,550 | |
| Research credit carryforwards | | | 235 | | | | 235 | |
| | | | 530 | | | | 420 | |
| Accrued expenses | | | 236 | | | | 188 | |
| Beneficial conversion feature, net | | | (338 | ) | | | — | |
| Other | | | (24 | ) | | | 79 | |
| Total deferred tax asset, net | | | 4,079 | | | | 4,472 | |
| Valuation allowance | | | (4,079 | ) | | | (4,472 | ) |
| Net deferred tax asset | | $ | — | | | $ | — | |
Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carry-forward period.
Because of our history of operating losses, management believes that the deferred tax assets arising from the above-mentioned future tax benefits are currently
not
likely to be realized and, accordingly, we have provided a full valuation allowance.
A reconciliation of the statutory tax rates and the effective tax rates is as follows:
| | | | |
| | | | | | | |
| Statutory rate | | | 34.0 | % | | | 34.0 | % |
| Permanent differences | | | (13.5 | ) | | | (4.0 | ) |
| Change in effective tax rates | | | (17.2 | ) | | | — | |
| Valuation allowance | | | (6.6 | ) | | | (30.7 | ) |
| Foreign research incentives | | | 3.8 | | | | — | |
| Deferred true-up | | | 3.0 | | | | — | |
| State tax rate true-up | | | — | | | | 0.6 | |
| Other | | | 0.3 | | | | (0.1 | ) |
| Effective rate | | | 3.8 | % | | | 0.0 | % |
Net operating losses and tax credit carryforwards as of
December
31,
2017,
are as follows:
| | | | | |
Net operating losses —federal | | $ | 12,958 | | Beginning 2031 |
| | | | 235 | | Beginning 2041 |
Utilization of the net operating loss carryforwards and credits
may
be subject to a substantial annual limitation due to the ownership change limitations provided by the IRC, and similar state provisions. We have
not
performed a detailed analysis to determine whether an ownership change under Section
382
of the IRC has occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change.
The Company is subject to taxation in the United States and Australia. Tax returns, since the inception of Sun BioPharma, Inc. in
2011
and thereafter, are subject to examinations by federal and state tax authorities and
may
change upon examination. Tax returns of Sun BioPharma Australia Pty Ltd. for the year ended
December
31,
2013
and thereafter are subject to examination by the Australian tax authorities.