12. Income Taxes
Loss before the provision for income taxes consisted of the following (in thousands):
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
U.S. operations |
|
$ |
(24,776 |
) |
|
$ |
(26,942 |
) |
|
$ |
(23,705 |
) |
|
Foreign operations |
|
|
(10,682 |
) |
|
|
(11,081 |
) |
|
|
(12,971 |
) |
|
Loss before provision for income taxes |
|
$ |
(35,458 |
) |
|
$ |
(38,023 |
) |
|
$ |
(36,676 |
) |
No provision for income taxes was recorded in the periods presented due to tax losses incurred in each period. The income tax provision differs from the amount computed by applying the statutory income tax rate of 34% to pre-tax loss as follows (in thousands):
|
|
|
Year Ended December 31, |
|
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
|||
|
Tax (benefit) at statutory federal rate |
|
|
34.0 |
|
% |
|
34.0 |
|
% |
|
34.0 |
|
% |
|
State tax (benefit), net of federal benefit |
|
|
1.2 |
|
|
|
0.6 |
|
|
|
(1.6 |
) |
|
|
Foreign tax rate differential |
|
|
(10.2 |
) |
|
|
(9.9 |
) |
|
|
(12.0 |
) |
|
|
Permanent differences |
|
|
(1.0 |
) |
|
|
(3.2 |
) |
|
|
2.9 |
|
|
|
Research and development credits |
|
|
0.7 |
|
|
|
1.0 |
|
|
|
(0.8 |
) |
|
|
Change in valuation allowance |
|
|
127.2 |
|
|
|
(22.5 |
) |
|
|
(22.5 |
) |
|
|
Change in tax rate |
|
|
(151.6 |
) |
|
|
- |
|
|
|
- |
|
|
|
Other |
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
Effective tax rate |
|
|
- |
|
% |
|
- |
|
% |
|
- |
|
% |
Deferred income taxes reflect the net tax effects of loss and credit carry-forwards and 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 the Company’s deferred tax assets for federal and state income taxes are as follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carry-forwards |
|
$ |
109,714 |
|
|
$ |
156,066 |
|
|
Federal and state research credit carry-forwards |
|
|
14,520 |
|
|
|
13,177 |
|
|
Capitalized research costs |
|
|
6,304 |
|
|
|
4,824 |
|
|
Deferred revenue |
|
|
— |
|
|
|
244 |
|
|
Stock-based compensation |
|
|
4,528 |
|
|
|
5,739 |
|
|
Property and equipment |
|
|
83 |
|
|
|
120 |
|
|
Accrued liabilities |
|
|
117 |
|
|
|
207 |
|
|
Gross deferred tax assets |
|
|
135,266 |
|
|
|
180,377 |
|
|
Valuation allowance |
|
|
(135,266 |
) |
|
|
(180,377 |
) |
|
Net deferred tax assets |
|
$ |
— |
|
|
$ |
— |
|
The Company’s unrecognized tax benefits relate to research and development tax credits claimed on the Company’s tax returns. The research and development tax credits have not been utilized, are fully offset by a valuation allowance, and currently have no tax expense impact.
A reconciliation of the Company’s beginning and ending amount of unrecognized tax benefits is follows (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Unrecognized tax benefits at beginning of period |
|
$ |
1,441 |
|
|
$ |
1,381 |
|
|
Increases related to current year tax positions |
|
|
57 |
|
|
|
60 |
|
|
Increase related to change in tax rate |
|
|
271 |
|
|
|
— |
|
|
Unrecognized tax benefits at the end of period |
|
$ |
1,769 |
|
|
$ |
1,441 |
|
Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance decreased by approximately $45.1 million during the year ended December 31, 2017, and increased by approximately $8.5 million and $8.4 million during the years ended December 31, 2016 and 2015, respectively.
As of December 31, 2017, the Company had federal net operating loss carry-forwards of $432.9 million and federal research and development tax credit carry-forwards of $8.5 million. If not utilized, the federal net operating loss and tax credit carry-forwards will expire at various dates beginning in 2018. As of December 31, 2017, the Company had state net operating loss carry-forwards of $269.0 million, which expire beginning in 2018, and state research and development tax credit carry-forwards of $7.4 million, which do not expire.
Utilization of these net operating loss and tax credits carry-forwards may be subject to a substantial annual limitation due to the ownership change rules under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). The limitations are applicable if an “ownership change,” as defined in the Code, is deemed to have occurred or occurs in the future. The annual limitation may result in the expiration of net operating loss and credit carry-forwards before they can be utilized.
The Company recognizes the financial statement effect of tax positions when it is more likely than not that the tax positions will be sustained upon examination by the appropriate taxing authorities. As of December 31, 2017, 2016 and 2015, the Company had unrecognized tax benefits of $1.8 million, $1.4 million, and $1.4 million, respectively.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Act") was enacted into law and the new legislation reduces the corporate tax rate to 21 percent, effectively January 1, 2018. Consequently, the Company remeasured the deferred tax assets and recorded a decrease in deferred tax assets and valuation allowance of $53.7 million. The Company believes that the one-time transition tax does not apply because there were no post-1986 earnings and profits (E&P) previously deferred from US income taxes. The Company had reviewed the effects of global intangible low-taxed income (“GILTI”) tax rules and does not expect any significant impact to its deferred tax assets. In accordance with SAB 118, the income tax effects from the Act are considered provisional and will be finalized before December 22, 2018.
The Company files U.S. federal and California tax returns. The Company’s wholly owned subsidiaries, Sunesis Europe Limited and Sunesis Pharmaceuticals (Bermuda) Ltd., are currently not required to file tax returns. To date, neither the Company nor any of its subsidiaries have been audited by the Internal Revenue Service, any state income tax authority or tax authority in the related jurisdictions. Due to net operating loss carry-forwards, substantially all of the Company’s tax years remain open to federal tax examination.