10. Income Taxes
The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21% in 2018, eliminating certain deductions, imposing a mandatory one-time transition tax, or deemed repatriation tax, on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. While the effective date of the new corporate tax rates for the Company is January 1, 2018, the Company is required to calculate the effects of changes in tax rates and laws on deferred tax balances in 2017, the period in which the legislation was enacted. The impact of the 2017 Tax Act on the 2017 income tax provision was primarily related to the newly enacted lower statutory federal corporate tax rate. The Company is not impacted by the one-time transition tax.
The Company has not completed its determination of the accounting implications of the 2017 Tax Act on its tax accruals. However, the Company has reasonably evaluated an income tax expense as a provisional estimate of the 2017 Tax Act, fully offset by a corresponding valuation allowance. The significant component of this expense primarily relates to the remeasurement of net deferred tax assets at the lower enacted statutory federal corporate tax rate. As the Company completes its analysis of the 2017 Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact the Company’s provision for income taxes in the period in which the adjustments are made.
The Company did not record a current or deferred income tax expense or benefit for the years ended December 31, 2017 and 2016, due to the Company’s net losses and increases in its deferred tax asset valuation allowance. The components of loss before income taxes and a reconciliation of the statutory federal income tax with the provision for income taxes are as follows:
|
|
|
Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Federal tax at statutory rate |
|
(34.00%) |
|
|
(34.00%) |
|
||
|
State and local tax at statutory rates, net of federal income tax |
|
|
(0.83 |
) |
|
|
(0.83 |
) |
|
Research and development credits |
|
|
(1.72 |
) |
|
|
(3.77 |
) |
|
Other |
|
|
1.42 |
|
|
|
1.32 |
|
|
Change in valuation allowance |
|
|
(17.64 |
) |
|
|
37.28 |
|
|
Remeasurement of U.S. net deferred tax assets from 35% to 21% |
|
|
52.77 |
|
|
|
0.00 |
|
|
Effective tax rate |
|
|
0.00 |
% |
|
|
0.00 |
% |
The Company’s income tax provision was computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income and for tax carryforwards, recorded at the enacted federal statutory income tax rate. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
18,819,077 |
|
|
$ |
23,146,178 |
|
|
Accrued expenses |
|
|
204,599 |
|
|
|
18,400 |
|
|
Stock-based compensation |
|
|
96,578 |
|
|
|
96,570 |
|
|
Research and development credits |
|
|
3,038,863 |
|
|
|
2,670,688 |
|
|
Other |
|
|
13,953 |
|
|
|
20,784 |
|
|
Total deferred tax assets |
|
$ |
22,173,070 |
|
|
$ |
25,952,620 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Fixed assets |
|
|
3,606 |
|
|
|
8,434 |
|
|
Total deferred tax liabilities |
|
|
3,606 |
|
|
|
8,434 |
|
|
Net deferred tax assets before valuation allowance |
|
|
22,169,464 |
|
|
|
25,944,186 |
|
|
Less valuation allowance |
|
|
(22,169,464 |
) |
|
|
(25,944,186 |
) |
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
When realization of the deferred tax asset is more likely than not to occur, the benefit related to the deductible temporary differences attributable to operation is recognized as a reduction of income tax expense. Valuation allowances are provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. The Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets, and accordingly, a full valuation allowance has been provided on its net deferred tax assets. The valuation allowance decreased $3,774,722 in 2017 primarily as a result of the changes in the 2017 Tax Act offset by an increase with allowance on the NOL carryforward and increased $6,334,258 in 2016 as a result of an increase in the net operating loss (NOL) due to research and development credits carryforwards. The Company continues to monitor the need for a valuation allowance based on the profitability of its future operations.
At December 31, 2017, the Company has approximately $86,346,064 of federal NOL carryforwards that have a 20-year carryforward period expiring at various dates through 2038. Additionally, the Company also has approximately $69,509,257 of state NOL carryforwards that expire from 2018 through 2038. Finally, at December 31, 2017, the Company had approximately $3,038,863 of federal research and development credit carryforwards that expire at various dates through 2038.
Under the provisions of the Internal Revenue Code, NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may be subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders by more than 50% over a three-year period, as defined in Sections 382 and 383 of the Internal Revenue Code and similar state provisions. The amount of the annual limitation is determined based on the value of the Company immediately before the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since the date of the Company’s formation due to the significant complexity and cost associated with such study and that there could be additional changes in control in the future. As a result, the Company is unable to estimate the effect of these limitations, if any, on the Company’s ability to utilize NOL and tax credit carryforwards in the future.
The Company has not yet conducted a study to document whether its research activities may qualify for the research and development tax credit. Such a study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credit and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.
As of December 31, 2017 and 2016, the Company had no accrued uncertain tax positions or associated interest or penalties and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive loss.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All years remain open and are subject to examination by federal and state taxing authorities.