Entity information:

• Entity registrant name: NEKTAR THERAPEUTICS
• CIK: 0000906709
• SEC filing page: http://www.sec.gov/Archives/edgar/data/906709/000156459018004105/0001564590-18-004105-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/906709/000156459018004105/nktr-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/906709/000156459018004105/nktr-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0000906709
• Generator: Donnelley Financial Solutions
• Total assets: 508,866,000
• Income tax expense (benefit): 616,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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Note 12 — Income Taxes

Loss before provision for income taxes includes the following components (in thousands):

 

 

Provision for Income Taxes

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

 

 

Income tax provision related to continuing operations differs from the amount computed by applying the statutory income tax rate of 35% to pretax loss as follows (in thousands):

 

Tax Law Changes

The U.S. Tax Cuts and Jobs Act (the Tax Act) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% in 2017 to 21% in 2018, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax.

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which includes the change in the federal rate to 21%. Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands):

 

Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of our lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $169.3 million during the year ended December 31, 2017 and increased by $52.5 million and $17.3 million during the years ended December 31, 2016 and 2015, respectively. The decrease in the valuation allowance for year ended December 31, 2017 is primarily due to the change in the federal rate. The valuation allowance includes approximately $35.6 million of income tax benefit at both December 31, 2017 and December 31, 2016 related to stock-based compensation that will be included in income tax expense in our Consolidated Statement of Operations when realized.

The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. As of December 31, 2017, we estimate that there is negative E&P on an aggregate basis and we have not recorded a provisional amount for any one-time transition tax triggered by the Tax Act. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2017, we had a net operating loss carryforward for federal income tax purposes of approximately $1,610.3 million, portions of which will begin to expire in 2018. As of December 31, 2017, we had a total state net operating loss carryforward of approximately $474.0 million, portions of which will begin to expire in 2019. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions.

We have federal research credits of approximately $64.0 million, which will begin to expire in 2019 and state research credits of approximately $33.3 million which have no expiration date. We have federal orphan drug credits of $17.7 million which will begin to expire in 2026. These tax credits are subject to the same limitations discussed above.

Unrecognized tax benefits

We have incurred net operating losses since inception. Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for income taxes in the consolidated statements of operations. If we are eventually able to recognize our uncertain positions, our effective tax rate may be reduced. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to our uncertain tax positions would result in an adjustment of our net operating loss or tax credit carry forwards rather than resulting in a cash outlay. The decrease in the unrecognized tax benefits in 2015 primarily relates to a California Supreme Court decision relating to the calculation of apportionment of income.

We file income tax returns in the U.S., California, Alabama, and India. Because of net operating losses and research credit carryovers, substantially all of our domestic tax years remain open and subject to examination. We are currently under examination in India for the fiscal years ending 2009 and 2016.

We have the following activity relating to unrecognized tax benefits (in thousands):

 

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve months. During the years ended December 31, 2017, 2016 and 2015, no significant interest or penalties were recognized relating to unrecognized tax benefits.