Income taxes
The Tax Cuts and Jobs Act ("Tax Reform Act"), which was signed into law on December 22, 2017, significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax systems and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending deferred tax assets and liabilities at December 31, 2017. Due to the Company's full valuation allowance, no provisional tax expense or benefit associated with the re-measurement was recognized in the Company's consolidated statement of operations and comprehensive loss for the year ended December 31, 2017. However, the reduction of the U.S. federal corporate tax rate from 35% to 21% resulted in increases to the amounts reflected in the “Change in valuation allowance” and "Change in tax rate" captions for the year ended December 31, 2017 in the Company’s tax reconciliation table compared to those amounts disclosed for the years ended December 31, 2016 and 2015. The change in the U.S. federal corporate tax rate, which is effective January 1, 2018, is also reflected in the Company’s deferred tax table.
The Company has recognized the provisional tax impacts related to the revaluation of the deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act, which could result in changes to the provisional tax impacts during 2018.
For the years ended December 31, 2017 and 2016, the Company did not record a current or deferred income tax expense or benefit. The Company’s losses before income taxes consist solely of domestic losses. The significant components of the Company’s deferred tax assets are comprised of the following:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
U.S and state net operating loss carryforwards | $ | 42,895 |
| | $ | 52,829 |
|
Capitalized R&D | 21,924 |
| | 20,280 |
|
Research and development credits | 8,582 |
| | 6,422 |
|
Stock-based compensation | 1,808 |
| | 2,184 |
|
Accrued expenses | 474 |
| | 794 |
|
Depreciation and amortization | 761 |
| | 784 |
|
Other temporary differences | 116 |
| | 365 |
|
Total deferred tax assets | 76,560 |
| | 83,658 |
|
Less valuation allowance | (76,560 | ) | | (83,658 | ) |
Net deferred tax assets | $ | — |
| | $ | — |
|
The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2017 and 2016. The valuation allowance decreased approximately $7.1 million during the year ended December 31, 2017 due primarily to the adjustment in the corporate tax rate from 34% to 21% enacted for 2018 partially offset by the generation of net operating losses. The valuation allowance increased approximately $21.0 million during the year ended December 31, 2016, due primarily to the Company's election to capitalize and amortize certain research and development expenses.
A reconciliation of income tax expense computed at the statutory federal income tax rate to income taxes as reflected in the consolidated financial statements is as follows:
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
Federal income tax expense at statutory rate | | 34.0 | % | | 34.0 | % | | 34.0 | % |
State income tax, net of federal benefit | | 5.1 | % | | 5.0 | % | | 4.6 | % |
Permanent differences | | (1.2 | )% | | (1.5 | )% | | (2.1 | )% |
Research and development credit | | 2.9 | % | | 2.5 | % | | 1.9 | % |
Change in tax rate | | (52.8 | )% | | 0.0 | % | | 0.0 | % |
Change in valuation allowance | | 12.5 | % | | (40.0 | )% | | (38.4 | )% |
Other, net | | (0.5 | )% | | 0.0 | % | | 0.0 | % |
Effective tax rate | | 0.0 | % | | 0.0 | % | | 0.0 | % |
As of December 31, 2017, 2016 and 2015, the Company had U.S. federal net operating loss carryforwards of approximately $160.6 million, $136.6 million and $143.8 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037. As of December 31, 2017, 2016 and 2015, the Company also had U.S. state net operating loss carryforwards of approximately $145.1 million, $121.2 million and $128.5 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2037. For the years ended December 31, 2017 and 2016, deductions related to the excess tax benefit from stock option exercises are recognized in the federal and state net operating loss carryforwards as a component of the tax provision. For the year ended December 31, 2015, approximately $2.8 million of excess tax benefits related to the exercise of stock options were included in the federal and state net operating loss carryforwards.
As of December 31, 2017 and 2016, the Company had federal research and development tax credit carryforwards of approximately $6.1 million and $4.8 million, respectively, available to reduce future tax liabilities which expire at various dates through 2037. As of December 31, 2017 and 2016, the Company had state research and development tax credit carryforwards of approximately $2.9 million and $2.5 million, respectively, available to reduce future tax liabilities which expire at various dates through 2032.
Under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Code, or could result in a change in control in the future.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations and comprehensive loss.
For all years through December 31, 2017, the Company generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position for these years. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.
The Company files income tax returns in the United States and various state jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2013 through December 31, 2017. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period.