11. Income Taxes
The reconciliation of the U.S. federal statutory rate to the Company’s effective tax rate is as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Tax at statutory rates |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State income taxes |
|
|
6.5 |
|
|
|
5.2 |
|
|
|
6.6 |
|
|
Permanent differences |
|
|
(2.5 |
) |
|
|
(1.2 |
) |
|
|
(1.3 |
) |
|
Research and development credits |
|
|
1.5 |
|
|
|
1.3 |
|
|
|
1.5 |
|
|
US tax rate change |
|
|
(52.7 |
) |
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance |
|
|
12.2 |
|
|
|
(40.3 |
) |
|
|
(41.8 |
) |
|
Effective tax rate |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The significant components of the Company’s deferred tax asset consist of the following at December 31, 2017 and 2016 (in thousands):
|
|
|
December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
62,670 |
|
|
$ |
69,411 |
|
|
Tax credits |
|
|
6,924 |
|
|
|
5,269 |
|
|
Other temporary differences |
|
|
2,723 |
|
|
|
1,636 |
|
|
Start-up expenditures |
|
|
3,214 |
|
|
|
5,088 |
|
|
Stock option expenses |
|
|
2,127 |
|
|
|
2,779 |
|
|
Total deferred tax assets |
|
|
77,658 |
|
|
|
84,183 |
|
|
Deferred tax asset valuation allowance |
|
|
(77,546 |
) |
|
|
(83,924 |
) |
|
Net deferred tax assets |
|
|
112 |
|
|
|
259 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
(112 |
) |
|
|
(259 |
) |
|
Net deferred taxes |
|
$ |
— |
|
|
$ |
— |
|
The Tax Cuts and Jobs Act was enacted in the United States on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, 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. In December 2017, the SEC issued SAB 118, which directs taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. As of December 31, 2017, we recognized a provisional amount of $0 for the transition tax.
We re-measured certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future, which is generally 21%. However, we are still examining certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of our deferred tax balance was a tax expense of $32.9 million which was offset by an adjustment to the valuation allowance against our deferred taxes of $32.9 million.
In 2017 and 2016, the Company did not record a benefit for income taxes related to its operating losses incurred. ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical U.S. losses and future projections over the period in which the net deferred tax assets are deductible, at this time, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences, and as a result the Company continues to maintain a valuation allowance for the full amount of the 2017 deferred tax assets. The valuation allowance decreased $6.4 million, and increased $22.1 million and $18.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. The decrease in the 2017 valuation allowance is primarily attributable to the reduction in the US corporate tax rate enacted in Q4 2017. The increase in 2016 and 2015 is primarily related to each year’s taxable loss.
As of December 31, 2017, the Company had federal and state net operating losses of $229.1 million and $237.9 million, respectively, which are available to offset future taxable income, if any, through 2037. The Company also had federal and state research and development tax credits of $4.4 million and $3.2 million, respectively, which expire at various dates through 2037. Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future. The Company has not conducted an assessment to determine whether there may have been a Section 382 or 383 ownership change.
The Company has no unrecognized tax benefits. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expenses in the accompanying consolidated statements of operations. At December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state jurisdictions. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. The Company does not have any international operations as of December 31, 2017. The statute of limitations for assessment by federal and state tax jurisdictions in which the Company has business operations is open for tax years ending December 31, 2014, 2015, and 2016. The tax years under examination vary by jurisdiction.