PRESBIA PLC

(13) Income Taxes

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

	Year Ended December 31,
	2017			2016
Current provision:
Federal	$	—		$	—
State		2			4
Foreign		243			72
Total current	$	245		$	76
Deferred provision
Federal		(3,335	)		(255	)
State		—			—
Foreign		1,065			(1,228	)
Total deferred		(2,270	)		(1,483	)
Valuation allowance		2,270			1,483
Total deferred		—			—
Total income tax provision	$	245		$	76

A reconciliation of the federal statutory rate to the effective rate is as follows:

	Year Ended December 31,
	2017			2016
Expected income tax benefit at federal statutory rate		35	%		35	%
State tax provision, net of federal benefit		(0	%)		0	%
Foreign rate differential		(15	%)		(25	%)
Nondeductible expenses		(0	%)		0	%
Foreign Tax		(1	%)		0	%
Change in valuation allowance		(4	%)		(10	%)
Effect of Change in Tax Rate		(9	%)		0	%
Other		(7	%)		0	%
Income tax provision		(1.4	%)		(0.0	%)

The components of the Company’s deferred tax assets are summarized as follows (in thousands):

	Year Ended
	2017			2016
Deferred tax assets:
Net operating loss carryforwards	$	5,019		$	4,444
Accrued expenses		31			195
Stock based compensation		0			(11	)
Deferred tax assets		5,050			4,628
Valuation allowance		(5,033	)		(4,559	)
Net deferred tax assets		17			69
Deferred tax liabilities:
Depreciation		(17	)		(69	)
Total deferred tax liabilities		(17	)		(69	)
Net deferred tax asset	$	—		$	—

The valuation allowance has been established to offset the Company’s net deferred tax assets, as realization of such assets is not considered to be more likely than not due to the Company’s history of losses and uncertainties regarding the Company’s ability to generate future taxable income sufficient to realize the benefit of these deferred tax assets.

The Company has U.S. Federal net operating loss (“NOL”) carryforwards of approximately $11.1 million and $2.0 million for December 31, 2017 and 2016 respectively, subject to potential limitations pursuant to Internal Revenue Code section 382 as discussed below. The federal NOL carryforwards will begin to expire in 2033, unless previously utilized. The Company has NOL carryforwards in Ireland of $21.5 million and $21.2 million for December 31, 2017 and 2016, respectively. Under Irish rules, only such losses that occur within a three year period prior to commencing trading can be utilized to offset future trading taxable income.

Pursuant to Sections 382 of the Internal Revenue Code (the “Code”), annual use of the Company’s NOL carryforwards may be limited in the event a cumulative change in ownership of 50% of certain shareholders occurs within a three year period. An ownership change may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain shareholders.

As of December 31, 2017, the Company has provided a liability of $199,000 for unrecognized tax benefits relating to a foreign income tax matter. This amount is expected to reduce our effective income tax rate if recognized in future reporting periods.

The Company does not anticipate a significant increase in the unrecognized tax benefits over the next 12 months. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of the income tax provision. As of December 31, 2017 and December 31, 2016, the Company has $39,000 and $0, respectively, of tax related accrued interest and penalties on its balance sheet or on its statement of operations.

A reconciliation of gross unrecognized tax benefits is as follows:


		Year Ended December 31,
		2017		2016
Balance at the beginning of the year		—		—
Increases related to current year tax positions		199,000		—
Balance at the end of the year	$	199,000	$	—

Due to net operating loss carryovers, the U.S. federal and state returns are open to examination by the Internal Revenue Service and state jurisdictions for years 2014 through 2017. The foreign income tax returns are open to examination for the years 2013 through 2017.

On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the 2017 Act) into law. The Act will have pervasive financial reporting implications for all companies with US operations, including reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent. We reviewed and incorporated the new tax bill implications through 2017 financial statements. We remeasured the deferred taxes at new corporation rate of 21%, which reduced the net deferred tax assets, before valuation allowance, by $1,567,000. Due to full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance. The 2017 Act has no significant impact on the 2017 financial statements.

On December 22, 2017, Staff Accounting Bulletin No. 118, or SAB 118, was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. 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. Any subsequent adjustment to these amounts will be recorded to current tax expense in 2018 when the analysis is complete.