(13) INCOME TAXES

Under financial accounting standards, deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates. Deferred income tax expense or benefit represents the change in the deferred tax assets or liabilities from period to period. At December 31, 2017, the Company had federal net operating loss, state net operating loss, and foreign net operating loss carryforwards of approximately $867.8 million, $357.0 million, and $9.3 million, respectively for financial reporting purposes, which may be used to offset future taxable income. The Company also had federal and state research tax credit carryforwards of $9.7 million and $5.2 million, respectively which may be used to offset future income tax liability. The federal credit carryforwards begin to expire in 2021 through 2037 and are subject to review and possible adjustment by the Internal Revenue Service. A portion of the state credit carryforwards expired in 2017 and the remainder begin to expire in 2018 through 2032 and are subject to review and possible adjustment by state tax jurisdictions.  In the event of a change of ownership, the federal and state net operating loss and research and development tax credit carryforwards may be subject to annual limitations provided by the Internal Revenue Code and similar state provisions.

 

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-09, “Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” as part of its Simplification Initiative which among other things changed the accounting for excess tax benefit stock option deductions. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital. The Company adopted ASU 2016-09 in the first quarter of 2017 on a modified retrospective basis. As of December 31, 2016, the Company had $62.7 million in excess tax benefit stock option deductions for which a deferred tax asset was established upon adoption in 2017. There will be no change to retained earnings with respect to the excess tax benefits, as the resulting deferred tax asset is fully offset by the Company’s valuation allowance.

The Company recorded an income tax benefit of approximately $0.2 million related to the Sampleminded acquisition completed on August 1, 2017. After considering the deferred tax liability acquired as part of the acquisition, the projected post-combination results and all available evidence, the Company released $0.2 million of valuation allowance that was previously provided against the Company’s deferred tax assets.

The expense (benefit) for income taxes consists of:

 

The components of the net deferred tax asset with the approximate income tax effect of each type of carryforward, credit and temporary differences are as follows:

 

 

A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income, management has determined that a valuation allowance of $233.8 million and $277.9 million at December 31, 2017 and 2016, respectively, is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance for December 31, 2017 and 2016 was a decrease of $44.1 million and an increase of $62.8 million, respectively. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

The Tax Cuts and Jobs Act (H.R. 1) was signed into law on December 22, 2017 (the “Act”).  The Act reduces the US federal corporate income tax rate from 35 percent to 21 percent.  The company remeasured deferred tax assets and liabilities based on the new corporate tax rate.  The Company recorded an adjustment related to the remeasurment of the Company’s deferred tax balance of $124.9 million. There was no impact on income tax expense as a result of the remeasurement due to the existence of the valuation allowance. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

The effective tax rate differs from the statutory tax rate due to the following:

 

There are no unrecognized tax benefits as of December 2017, 2016 and 2015, nor are there any tax positions where it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the 12 months following December 31, 2017.

As of December 31, 2017, due to the carryforward of unutilized net operating losses and research and development credits, the Company is subject to U.S. Federal income tax examinations for the tax years 1999 through 2017, and to state income tax examinations for the tax years 2003 through 2017. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2017, 2016 and 2015.