10. Income Taxes
For the year ended December 31, 2017, we recorded an income tax expense of $1.7 million as compared to an income tax benefit of $31.0 million for the year ended December 31, 2016 and an income tax expense of $37.8 million for the year ended December 31, 2015.
For the year ended December 31, 2017, the income tax expense related to deficiency interest was based on the Internal Revenue Service reducing our tentative net operating loss carryback refund claim filed in March 2017. For the year ended December 31, 2016, the federal tax benefit represents the reversal of the federal tax provided in 2015 due to our ability to carryback federal tax attributes generated this year but not in an amount that is lower than any minimum taxes as provided under federal law. The state tax benefit in the current year represents the reversal of prior state income tax also to an amount that is not lower than any minimum tax as provided under state law. For the year ended December 31, 2015, the income tax expense was based on the taxable income generated in 2015 after utilization of our available federal and state net operating loss carryovers as well as any research credits including consideration of any applicable limitations on the use of these attributes as provided by the Internal Revenue Code and similar state statutes.
The components of our income tax (benefit) expense were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current tax (benefit) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,703 |
|
|
$ |
(40,740 |
) |
|
$ |
47,369 |
|
|
State |
|
|
1 |
|
|
|
(5,340 |
) |
|
|
5,473 |
|
|
Total current (benefit) expense |
|
|
1,704 |
|
|
|
(46,080 |
) |
|
|
52,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
15,032 |
|
|
|
(15,032 |
) |
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total deferred tax (benefit) expense |
|
|
— |
|
|
|
15,032 |
|
|
|
(15,032 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) expense |
|
$ |
1,704 |
|
|
$ |
(31,048 |
) |
|
$ |
37,810 |
|
The income tax (benefit) expense differs from the amount computed by applying the statutory federal income tax rate as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory income tax |
|
$ |
(51,981 |
) |
|
$ |
(33,862 |
) |
|
$ |
100,610 |
|
|
State statutory income tax |
|
|
1 |
|
|
|
(3,471 |
) |
|
|
3,558 |
|
|
Stock compensation |
|
|
(4,847 |
) |
|
|
715 |
|
|
|
437 |
|
|
Nontaxable equity premiums |
|
|
(168 |
) |
|
|
(248 |
) |
|
|
(443 |
) |
|
Change in valuation allowance |
|
|
41,633 |
|
|
|
12,152 |
|
|
|
(62,705 |
) |
|
Remeasurement of deferred taxes |
|
|
27,122 |
|
|
|
— |
|
|
|
— |
|
|
Research and orphan drug credits |
|
|
(11,029 |
) |
|
|
(8,029 |
) |
|
|
(3,846 |
) |
|
Interest charge, net of federal benefit |
|
|
1,107 |
|
|
|
— |
|
|
|
— |
|
|
Other permanent items |
|
|
(134 |
) |
|
|
1,695 |
|
|
|
199 |
|
|
Income tax (benefit) expense |
|
$ |
1,704 |
|
|
$ |
(31,048 |
) |
|
$ |
37,810 |
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Tax Act, was signed into law. The Tax Act reduces the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting for the deferred tax re-measurement to be provisional. The primary impact of the Tax Act resulted from the re-measurement of deferred tax assets and liabilities due to the change in the corporate tax rate, reducing our deferred tax assets by $27.1 million with a corresponding reduction in our valuation allowance, which had no effect on our effective tax rate. Additional work will be necessary for a more detailed analysis of our deferred tax assets and liabilities as well as potential correlative adjustments. We do not expect any material subsequent adjustments to these amounts. Adjustments, if any, are not expected to have any impact to our results of operations due to our loss position and valuation allowance.
The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets consist of the following (in thousands):
|
|
|
As of December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Net operating loss carryforwards |
|
$ |
39,405 |
|
|
$ |
5,615 |
|
|
Research and orphan drug credits |
|
|
42,070 |
|
|
|
18,182 |
|
|
Deferred revenue |
|
|
3,701 |
|
|
|
10,939 |
|
|
Stock-based compensation |
|
|
7,017 |
|
|
|
6,908 |
|
|
Capitalized license and depreciation basis differences |
|
|
— |
|
|
|
3,574 |
|
|
Reserves, accruals and tenant improvement allowances |
|
|
5,299 |
|
|
|
1,736 |
|
|
Total deferred tax assets |
|
|
97,492 |
|
|
|
46,954 |
|
|
Less: valuation allowance |
|
|
(94,315 |
) |
|
|
(46,954 |
) |
|
Net deferred tax assets |
|
$ |
3,177 |
|
|
$ |
— |
|
|
Capitalized license and depreciation basis differences |
|
|
(3,177 |
) |
|
|
— |
|
|
Total deferred tax liabilities |
|
$ |
(3,177 |
) |
|
$ |
— |
|
|
Total net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
Based on all available objective evidence, we determined it is more likely than not that we will not fully realize all our net deferred tax assets. The available objective evidence considered was our inability to further recover any taxes previously paid and expectation of future taxable income. Accordingly, we recorded a valuation allowance against all our net deferred tax assets for the years ended December 31, 2017 and 2016. We will continue to maintain a full valuation allowance on our net deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of this allowance. Our valuation allowance increased by $47.4 million and $31.4 million during 2017 and 2016, respectively.
At December 31, 2017, we had approximately $156.5 million of federal net operating losses available for future use that expire beginning in 2024 and federal research and Orphan Drug credits of approximately $36.7 million available for future use that expire beginning in 2026.
At December 31, 2017, we also had approximately $154.3 million of state net operating losses available for future use that expire beginning in 2018 and state research credits of approximately $16.4 million that have no expiration date.
Utilization of net operating loss and tax credit carryforwards may be subject to an annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.
We had $13.6 million, $9.4 million and $3.4 million of unrecognized tax benefits as of December 31, 2017, 2016 and 2015, respectively. The unrecognized tax benefits are primarily tax credits for all years and state net operating loss carryover related for certain prior years. As of December 31, 2017, we recorded $1.7 million of interest related to income taxes and no interest or penalties as of December 31, 2016. A reconciliation of our unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
|
|
|
Unrecognized |
|
|
|
|
|
Income Tax |
|
|
|
|
|
Benefits |
|
|
|
Balance as of December 31, 2014 |
|
$ |
2,237 |
|
|
Additions for prior year tax positions |
|
|
615 |
|
|
Additions for current year tax positions |
|
|
580 |
|
|
Balance as of December 31, 2015 |
|
|
3,432 |
|
|
Additions for prior year tax positions |
|
|
4,394 |
|
|
Additions for current year tax positions |
|
|
1,577 |
|
|
Balance as of December 31, 2016 |
|
|
9,403 |
|
|
Additions for prior year tax positions |
|
|
691 |
|
|
Additions for current year tax positions |
|
|
3,490 |
|
|
Balance as of December 31, 2017 |
|
$ |
13,584 |
|
In the event we are able to recognize these uncertain positions, most of the $13.6 million of the unrecognized tax benefits would reduce our effective tax rate. We currently have a full valuation allowance against our deferred tax assets, which would impact the timing of the effective tax rate benefit, should any of these uncertain positions be favorably settled in the future. We do not believe it is reasonably possible that our unrecognized tax benefits will significantly change within the next twelve months.
We file U.S. and state income tax returns with varying statutes of limitations. The tax years from 2002 forward remain open to examination due to the carryover of unused net operating losses and tax credits. We have no ongoing tax examinations by tax authorities at this time.