Note 4: Income Taxes

The income tax provision (benefit) consisted of the following (in thousands):

On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. Changes include, but are not limited to, reducing the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018 and repealing the alternative minimum tax (“AMT”) for tax years beginning in 2018.

Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations. 

As a result of the Act, the Company revalued its federal deferred tax assets and liabilities to the new rate of 21%. The Company’s effective tax rate for the year ended December 31, 2017 was not impacted from this revaluation due to its valuation allowance.  Additionally, the Company paid $0.2 million in federal AMT tax for 2011, which, under the Act, is now refundable through 2022 subject to limitations by year, and is therefore recorded as a deferred tax asset as of December 31, 2017.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities were (in thousands):

The valuation allowance decreased by $20.6 million for the year ended December 31, 2017 and increased by $9.8 million for the year ended December 31, 2016.

As of December 31, 2017, the Company had NOLs of approximately $196.1 million for federal income tax purposes and approximately $119.6 million for state income tax purposes. These losses are available to reduce future taxable income and expire at various times from 2025 through 2037.

The Company also had federal research and development tax credit carryforwards of approximately $9.1 million, which will begin expiring in 2018, and California research and development credits of approximately $8.1 million, which do not have an expiration date. The Company had remaining foreign tax credits available for federal income tax purposes of approximately $0.3 million, which will begin expiring in 2018.

Utilization of the Company’s NOLs and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code (“IRC”); and similar state provisions. Section 382 of the IRC (“Section 382”) imposes limitations on a corporation’s ability to utilize its NOLs, if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership percentage of certain stockholders in the stock of the corporation by more than 50% over a three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate. The Company has not completed a Section 382 study in recent years; however, should a study be completed, certain NOLs may be subject to such limitations. Any future annual limitation may result in the expiration of NOLs before utilization.

The Company is in the process of dissolving its only foreign subsidiary. As of December 31, 2017, the Company has no unremitted earnings from its foreign subsidiary.

A reconciliation of income taxes provided at the federal statutory rate (35%) to the actual income tax provision follows (in thousands):

The domestic and foreign components of loss before income tax provision were (in thousands):