Note 17. Income Taxes

Deferred income taxes result from differences in the recognition of expenses for tax and financial reporting purposes, as well as operating loss and tax credit carryforwards. Significant components of the Company’s deferred income tax assets as of December 31, 2017 and 2016, are as follows (in thousands):

 

 

The net decrease in the valuation allowance in 2017 and 2016 was $78.4 million and $15.2 million, respectively. As of December 31, 2017, the Company had no significant deferred tax liabilities.

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018.  As a result of the reduction in the corporate income tax rate, the Company will need to revalue its net deferred tax asset at December 31, 2017. We estimate that this will result in a reduction in the value of our net deferred tax asset of approximately $98.4 million, which will be offset by the change in valuation allowance of $98.4 million.

As of December 31, 2017, the Company had approximately $640.4 million and $276.2 million of net operating loss, or NOL, carryforwards with which to offset its future taxable income for federal and state income tax reporting purposes, respectively. The federal and state NOL carryforwards will begin expiring in 2022 and 2028, respectively, unless previously utilized.

As of December 31, 2017, the Company has federal and state research credit carryforwards of approximately $13.2 million, and $5.3 million, respectively.  The federal research credit carryforwards will begin expiring in 2018, unless previously utilized.  The state research credit carryforwards do not expire.

Utilization of the Company’s NOL and tax credit carryforwards, or Tax Attributes, may be subject to substantial annual limitations provided by the Code and similar state provisions to the extent certain ownership changes are deemed to occur. Such an annual limitation could result in the expiration of the Tax Attributes before utilization. The Tax Attributes reflected above have not been reduced by any limitations. To the extent it is determined upon completion of the analysis that such limitations do apply, the Company will adjust the Tax Attributes accordingly. The Company faces the risk that its ability to use its Tax Attributes will be substantially restricted if it undergoes an “ownership change” as defined in Section 382 of the Code, or Section 382.

An ownership change under Section 382 would occur if “5-percent shareholders,” within the meaning of Section 382, collectively increased their ownership in the Company by more than 50 percentage points over a rolling three-year period. The Company has completed studies through December 31, 2016 and concluded that no adjustments were required. If there is a future change of control, the Company’s NOL carryforwards and tax credits may not be available, or their utilization could be subject to an annual limitation under Section 382. A full valuation allowance has been provided against the Company’s NOL carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Accordingly, there would be no impact on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance affects entities that issue share-based payment awards to their employees and is designed to simplify several aspects of accounting for share-based payment award transactions which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The Company adopted this standard in the first quarter of 2017. Under ASU 2016-09, excess tax benefits and deficiencies are required to be recognized prospectively as part of provision for income taxes rather than additional paid-in capital. The Company's cumulative effect of windfall tax attributes are approximately $17.4 million. After applying the valuation allowance, no adjustment was recorded to the beginning retained earnings balance.

The provision (benefit) for income taxes is based upon the loss from continuing operations before income taxes as follows (in thousands):

The provision (benefit) for income taxes consists of the following (in thousands):

 

The effective tax rate differs from the amount computed by applying the statutory federal income tax rates as follows:

 

The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

The remaining balance of unrecognized tax benefits recorded on the Company’s consolidated balance sheets is as follows (in thousands):

 

As the Company is not currently under examination, it is reasonable to assume that the balance of gross unrecognized tax benefits will likely not change in the next twelve months. The Company currently has not recorded interest and penalties relating to uncertain tax positions.