10. Income Taxes
The income tax (benefit) for the year ended December 31, 2017 consisted of the following:
|
|
|
Year ended December 31, 2017 |
|
|
|
|
|
(in thousands) |
|
|
|
U.S. federal taxes: |
|
|
|
|
|
Current |
|
$ |
— |
|
|
Deferred |
|
|
(71,839 |
) |
|
Total U.S. federal taxes |
|
|
(71,839 |
) |
|
State taxes: |
|
|
|
|
|
Current |
|
|
388 |
|
|
Deferred |
|
|
(4,865 |
) |
|
Total state taxes |
|
|
(4,477 |
) |
|
Total |
|
$ |
(76,316 |
) |
|
|
|
|
|
|
There was no income tax benefit or expense for the years ended December 31, 2015 and 2016. The income tax benefit for the year ended December 31, 2017 resulted primarily from the partial release of our valuation allowance, described more fully below.
On December 22, 2017 President Donald Trump signed into U.S. law the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Tax Act introduced a broad range of tax reform measures that significantly change the federal income tax regime. Among other things, the Tax Act reduces the corporate income tax rate from 35% to 21% effective for tax years including or commencing on January 1, 2018, repeals corporate alternative minimum tax, limits various business deductions, modifies the maximum deduction of net operating loss with no carryback but indefinite carryforward provision, expands the deduction limit applicable to compensation paid to top executives of publicly traded companies, and includes various international tax related provisions. In accordance with ASC 740, the companies are required to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions of Tax Act is for tax years beginning after December 31, 2017, or in the case of certain other provisions of the law, January 1, 2018.
Accounting Standards Codification (ASC) 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which will allow companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. We have adjusted our deferred taxes based on the reduction of the U.S. federal corporate tax rate from 35% to 21% and assessed the realizability of our deferred tax assets based on our current understanding of the provisions of the new law. We consider our accounting for the impacts of the new tax law to be provisional and will continue to assess the impact of the recently enacted tax law (and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting) on our business and consolidated financial statements over the next 12 months.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
(in thousands) |
|
|||||
|
Federal and state net operating losses |
|
$ |
41,902 |
|
|
$ |
68,605 |
|
|
Capitalized research and patent costs |
|
|
13,278 |
|
|
|
23,575 |
|
|
Research credits |
|
|
22,606 |
|
|
|
19,058 |
|
|
Biopharma Financing Agreement |
|
|
— |
|
|
|
5,556 |
|
|
Stock-based compensation costs |
|
|
5,596 |
|
|
|
6,508 |
|
|
Other |
|
|
5,795 |
|
|
|
6,067 |
|
|
Total deferred tax assets |
|
|
89,177 |
|
|
|
129,369 |
|
|
Valuation allowance |
|
|
(12,474 |
) |
|
|
(129,369 |
) |
|
Net deferred tax assets |
|
$ |
76,703 |
|
|
$ |
— |
|
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Until the quarter ended December 31, 2017, we have maintained a full valuation allowance against our deferred tax assets due to the Company’s cumulative loss position and uncertainties regarding sustainable future profitability since inception.
We regularly assess the ability to realize deferred tax assets based on the weight of all available evidence, including such factors as the history of recent earnings and expected future taxable income on a jurisdiction by jurisdiction basis. During the fourth quarter, after considering these factors, we determined that the positive evidence overcame any negative evidence, primarily due to cumulative income in recent years, and the expectation of sustained profitability in future periods and concluded that it was more likely than not that the U.S. federal deferred tax assets and other-than-California state deferred tax assets were realizable. As a result, we released the valuation allowance against all of the U.S. federal deferred tax assets and other-than-California state deferred tax assets during the fourth quarter of fiscal year 2017. We maintain a full valuation allowance in relation to California deferred tax assets as of December 31, 2017 because of the uncertainty regarding the realizability of these deferred tax assets.
The valuation allowance decreased by $116.9 million, $4.3 million and $2.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. The decrease in the valuation allowance during 2017 was the result of our release of the entire valuation allowance previously established on our federal and non-California state deferred tax assets.
At December 31, 2017, we had net operating loss carryforwards available to offset any future taxable income that we may generate for federal income tax purposes of $159.5 million, which expire in the years 2025 through 2036, California net operating loss carryforwards of $95.4 million, which expire in the years 2018 through 2035, and net operating loss carryforwards from other states of $23.6 million, which expire in the years 2023 through 2036.
At December 31, 2017, we also had federal and California research and development tax credits of $19.2 million and $4.2 million, respectively. The federal research credits will expire in the years 2023 through 2037 and the California research credits have no expiration date.
Utilization of our net operating losses and tax credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such limitations could result in the expiration of the net operating losses and tax credit carryforwards before utilization.
Due to the adoption of ASU 2016-09 in 2017, all excess tax benefits and deficiencies are recognized as income tax expense in our consolidated statement of comprehensive income (loss). This will result in increased volatility in our effective tax rate.
The following table presents a reconciliation from the statutory federal income tax rate to the effective rate.
|
|
|
Year ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
U.S. federal taxes (benefit) at statutory rate |
|
$ |
17,954 |
|
|
$ |
2,840 |
|
|
$ |
(2,178 |
) |
|
Changes in valuation allowance |
|
|
(119,765 |
) |
|
|
(3,679 |
) |
|
|
2,495 |
|
|
Federal tax rate change impact to change in valuation allowance |
|
|
33,233 |
|
|
|
— |
|
|
|
— |
|
|
Unutilized research credits |
|
|
(1,199 |
) |
|
|
(69 |
) |
|
|
(445 |
) |
|
State income taxes |
|
|
(2,955 |
) |
|
|
— |
|
|
|
— |
|
|
Non-deductible Compensation |
|
|
33 |
|
|
|
2,435 |
|
|
|
— |
|
|
Stock-based compensation |
|
|
(3,826 |
) |
|
|
(1,660 |
) |
|
|
6 |
|
|
Other |
|
|
209 |
|
|
|
133 |
|
|
|
122 |
|
|
Total |
|
$ |
(76,316 |
) |
|
$ |
— |
|
|
$ |
— |
|
We maintain liabilities for uncertain tax positions. The measurement of these liabilities involves considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other pertinent information.
No amounts have been recognized as interest or penalties on income tax related matters.
The aggregate annual changes in the balance of gross unrecognized tax benefits are as follows (in thousands):
|
|
|
Year ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Beginning Balance |
|
$ |
3,527 |
|
|
$ |
4,342 |
|
|
Increase in tax positions for prior years |
|
|
150 |
|
|
|
222 |
|
|
Decreases in tax positions for prior years |
|
|
— |
|
|
|
(1,189 |
) |
|
Increase in tax positions for current year |
|
|
462 |
|
|
|
152 |
|
|
Ending Balance |
|
$ |
4,139 |
|
|
$ |
3,527 |
|
As of December 31, 2017 and 2016, the total amount of unrecognized tax benefits was approximately $4.1 million and $3.5 million, respectively. Of this balance, approximately $3.4 million would impact the effective tax rate since the valuation allowance related to these benefits was released in 2017. A valuation allowance is maintained on the remaining tax benefits related to California deferred tax assets and would not impact the effective tax rate. We had no or immaterial amounts of accrued interest and no accrued penalties related to unrecognized tax benefits as of December 31, 2017, December 31, 2016 and December 31, 2015. We do not expect our unrecognized tax benefits to change materially over the next 12 months.
While we believe we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the recorded position. Accordingly, our provisions on federal and state tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved.
All tax years from inception remain open to examination by the Internal Revenue Service, the California Franchise Tax Board and other state taxing authorities until such time as the net operating losses and research credits are either fully utilized or expire.