Entity information:

• Entity registrant name: PORTOLA PHARMACEUTICALS INC
• CIK: 0001269021
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1269021/000156459018004153/0001564590-18-004153-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1269021/000156459018004153/ptla-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1269021/000156459018004153/ptla-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001269021
• Generator: Donnelley Financial Solutions
• Total assets: 571,676,000
• Income tax expense (benefit):
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

---

14. Income Taxes

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

 

 

We did not record an income tax expense for the year ended December 31, 2017 and 2016.  We recorded an income tax benefit of $0.4 million for the year ended December 31, 2015.  The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows:

 

 

The components of U.S. deferred tax assets and (liabilities) are as follows (in thousands):

 

 

We received orphan designation and were eligible to claim a federal orphan drug credit starting in 2015 and reported the credit in 2017 and 2016.

 

Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence, including the fact that we have incurred significant losses in almost every year since our inception, we believe it is more likely than not that our deferred tax assets are not recognizable. Accordingly, deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by approximately $2.2 million for the year ended December 31, 2017, which consists of $133.9 million increase offset by $136.1 million decrease due to the remeasurement of the ending deferred tax assets and liabilities at 21%. The valuation allowance increased by approximately $114.2 million for the year ended December 31, 2016.

 

As of December 31, 2017, we had net operating loss carryforwards for federal income tax purposes of approximately $865 million and federal research tax credits of approximately $18 million and orphan drug credit of $114 million, which expire at various dates in the period from 2024 to 2037. We also have California net operating loss carry forwards of approximately $222 million which expire at various dates in the period from 2018 to 2032 and California research tax credits of approximately $8 million, which can be carried forward indefinitely. Our federal and state net operating loss carryforwards as of December 31, 2017 include amounts resulting from exercises and sales of stock option awards to employees and non-employees. When we realize the tax benefit associated with these stock option exercises as a reduction to taxable income in our returns, we will account for the tax benefit as a reduction of our income tax provision in our consolidated financial statements.

 

Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event that we had a change of ownership, utilization of the net operating loss and tax credit carryforwards may be limited under section 382.

Uncertain Tax Positions

We are subject to taxation in the United States. We have not been audited by the Internal Revenue Service or any state tax authority. We are no longer subject to audit by the Internal Revenue Service for income tax returns filed before 2015, and by the material state and local tax authorities for tax returns filed before 2014. However, carryforward tax attributes that were generated prior to these years may still be adjusted upon examination by tax authorities.

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

 

 

The amount of unrecognized income tax benefits that, if recognized, would affect our effective tax rate was $0 as of December 31, 2017 and December 31, 2016. If the $20.7 million and $13.9 million of unrecognized income tax benefits as of December 31, 2017 and 2016, respectively, is recognized, there would be no impact to the effective tax rate as any change will fully offset the valuation allowance. We do not expect that the unrecognized tax benefit will change within the next 12 months.

 

We recognize interest and penalties related to unrecognized tax benefits within income tax expense. Accrued interest and penalties are included within the related tax liability line in the accompanying consolidated balance sheets. Due to our net operating losses, we have not accrued any interest or penalty for any of our uncertain tax benefits as of December 31, 2017 and 2016.

On December 22, 2017 President Donald Trump signed into U.S. law the Tax Reform Act.  ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions of the law, January 1, 2018.  As a result of Tax Reform Act, the U.S. statutory tax rate was lowered from 35% to 21%, effective on January 1, 2018.  We are required to remeasure our U.S. deferred tax assets and liabilities to the new tax rate.  We reduced our net deferred tax assets by $136.1 million as a provisional amount due to the remeasurement which was offset by a full valuation allowance, and therefore, it had no impact to our provision for income taxes for the year ended December 31, 2017.

Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.

Amounts recorded, where we consider accounting to be provisional for the year ended December 31, 2017, principally relate to the impact of corporate income tax rate reduction on the deferred tax assets, on the corresponding change of deferred tax assets’ valuation allowance, and limitations on deductibility of compensation paid to certain highly paid employees.

The changes included in the Tax Reform Act are broad and complex. The final transition impacts of the Tax Reform Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Reform Act, any legislative action to address questions that arise because of the Tax Reform Act, and changes in accounting standards for income taxes or related interpretations in response to the Tax Reform Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts.