16. Income Taxes

In general, the Company has not recorded a provision for federal or state income taxes as it has had cumulative net operating losses since inception.

 On December 22, 2017, the Tax Cuts and Jobs Act was enacted. This law substantially amended the Internal Revenue Code, including reducing the U.S. corporate tax rates. Upon enactment, the Company’s deferred tax asset and related valuation allowance decreased by approximately $153.9 million.  As the deferred tax asset is offset in full by valuation allowance, this enacted legislation had no impact on the Company’s financial position or results of operations. The Company will monitor future interpretations of the Tax Act as they develop and accordingly, the Company’s estimates may change.

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows (in thousands):

 

Components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has considered the Company’s history of operating losses and concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company will not realize the benefit of its deferred tax assets. Accordingly, the deferred tax assets have been fully reserved at December 31, 2017 and 2016. Management reevaluates the positive and negative evidence on a quarterly basis.

The valuation allowance decreased approximately $95.8 million during the year ended December 31, 2017 primarily due to a decrease in net operating losses as a result of U.S. tax reform tax rate reduction, a decrease in contingent consideration, and a decrease in capitalized R&D, partially offset by the 2017 net operating loss and increase in tax credit carryforwards.

The valuation allowance increased approximately $66.3 million during the year ended December 31, 2016, primarily due to an increase in net operating losses, tax credit carryforwards, basis difference on the North America collaboration agreement and share-based compensation expense. During the year ended December 31, 2016, the Company closed the Lesinurad Transaction which resulted in an approximately $0.3 million deferred tax impact. Additionally, the 2016 change in valuation allowance noted in the table above reflects the impact of the Company’s early adoption of ASC 2016-09, Compensation – Stock Compensation, of an approximately $23.1 million increase in net operating losses recorded through retained earnings.

Subject to the limitations described below, at December 31, 2017 and 2016, the Company has federal net operating loss carryforwards of approximately $1,089.2 million and approximately $952.7 million, respectively, to offset future federal taxable income, which expire beginning in 2018 continuing through 2037. As of December 31, 2017 and 2016, the Company had state net operating loss carryforwards of approximately $807.7 million and approximately $686.2 million, respectively, to offset future state taxable income, which will begin to expire in 2027 and will continue to expire through 2037. The Company also had tax credit carryforwards of approximately $53.6 million and approximately $40.4 million as of December 31, 2017 and 2016, respectively, to offset future federal and state income taxes, which expire at various times through 2037.

Utilization of net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (“IRC Section 382”) and with Section 383 of the Internal Revenue Code of 1986, as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change, as defined by IRC Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company has completed several financings since its inception which may result in a change in control as defined by IRC Section 382, or could result in a change in control in the future.

The following table summarizes the changes in the Company’s unrecognized income tax benefits for the years ended December 31, 2017 and 2016 (in thousands):

The Company had gross unrecognized tax benefits of approximately $24.1 million, approximately $26.4 million, and approximately $17.6 million as of December 31, 2017, 2016, and 2015, respectively.  Of the approximately $24.1 million of total unrecognized tax benefits at December 31, 2017,  none of the unrecognized tax positions would, if recognized, affect the Company’s effective tax rate, as this item only impacts the Company’s deferred tax accounting.

The Company will recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2017,  no interest or penalties have been accrued.

The statute of limitations for assessment by the Internal Revenue Service (“IRS”) and state tax authorities is open for tax years ended December 31, 2016,  2015, and 2014, although carryforward attributes that were generated prior to tax year 2014 may still be adjusted upon examination by the IRS or state tax authorities if they either have been, or will be, used in a future period. There are currently no federal or state income tax audits in progress.