Income Taxes
No provision for income taxes has been recorded for the years ended December 31, 2017 and 2016 due to the operating losses incurred since inception for which no benefit has been recorded.
The reconciliation of the U.S. income tax rate to the effective income tax rate for continuing operations is as follows:
|
| | | | | | | |
| | AS OF DECEMBER 31, |
| | 2017 | | 2016 | |
Statutory tax rate | | 35.0 | % | | 35.0 | % | |
Effect of: | | | | | |
Permanent differences | | (6.4 | ) | | (1.5 | ) | |
Other | | (0.5 | ) | | (0.4 | ) | |
General business credits | | 15.1 |
| | 2.4 |
| |
Change in valuation allowance | | 15.6 |
| | (35.5 | ) | |
Tax Reform - tax rate change | | (58.8 | ) | | — |
| |
Effective tax rate | | — | % | | — | % | |
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.
Significant components of our deferred taxes are as follows (in thousands):
|
| | | | | | | | |
| | AS OF DECEMBER 31, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 39,971 |
| | $ | 52,154 |
|
Research and development credit | | 13,392 |
| | 5,582 |
|
Depreciation and amortization | | 1,241 |
| | 2,023 |
|
Other temporary differences | | 4,477 |
| | 6,154 |
|
Gross deferred tax assets | | 59,081 |
| | 65,913 |
|
Deferred tax asset valuation allowance | | (59,081 | ) | | (65,913 | ) |
Net deferred tax assets | | $ | — |
| | $ | — |
|
Accounting Standards Codification (ASC) 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which will allow companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Tax Act, was signed into law. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. The Company has adjusted its deferred tax assets and liabilities based on the reduction of the U.S. federal corporate tax rate from 35% to 21% and assessed the realizability of our deferred tax assets based on our current understanding of the provisions of the Tax Act. The primary impact of the Tax Act resulted from the re-measurement of deferred tax assets and liabilities due to the change in the corporate tax rate, reducing our deferred tax assets by $30.5 million with a corresponding reduction in our valuation allowance. Overall, this had a net zero effect on our effective tax rate for the year as the Company has a full valuation allowance against its deferred tax assets and is currently in a taxable loss. We consider our accounting for the impacts of the Tax Act to be incomplete and the Company will continue to assess the impact of the Tax Act (and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting) on our business and consolidated financial statements over the next 12 months. Additional work will be necessary for a more detailed analysis of our deferred tax assets and liabilities as well as potential correlative adjustments. We do not expect any material subsequent adjustments to these amounts. Adjustments, if any, are not expected to have any impact to our results of operations due to our loss position and valuation allowance.
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been offset by a valuation allowance. The valuation allowance relates primarily to net deferred tax assets from operating losses and research and development credits. The net deferred tax asset has been fully offset by a valuation allowance. The valuation allowance (decreased) increased by $(6.8) million and $18.9 million during 2017 and 2016, respectively.
As of December 31, 2017 and 2016, we had approximately $190.3 million and $152.5 million in federal net operating loss carryforwards and approximately $13.4 million and $5.6 million in federal research and development tax credit carryforwards, respectively. The net operating losses and federal research and development credits will begin to expire in varying amounts between 2028 and 2037 if not utilized.
The Tax Reform Act of 1986, or the Tax Reform Act, provides for a limitation on the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit our ability to utilize these carryforwards. We may have experienced an ownership change, as defined by the Act, as a result of past financings. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage of these carryforwards for federal income tax purposes.
As of January 1, 2017, the Company had unrecognized excess tax benefits of $1.2 million related to prior stock option exercises. Upon adoption of ASU 2016-09, the Company recognized this excess tax benefit as a deferred tax asset with a corresponding increase to the deferred tax asset valuation allowance.
We file income tax returns in the U.S. federal jurisdiction as well as the state of California. We are not currently under audit in any tax jurisdiction. Tax years from 2008 through 2017 are currently open for audit by federal and state taxing authorities.
We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2017 and 2016, we did not recognize any accrued interest or penalties associated with unrecognized benefits. Additionally, we did not record any unrecognized tax benefits at December 31, 2017 and 2016.