Income taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law and significantly revised U.S. corporate income tax law by, among other things, reducing the corporate income tax rate to 21% effective January 1, 2018, and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. 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 Tax Act. The Company has recognized provisional tax impacts related to revaluation of the Company’s domestic deferred tax assets and the impact of revaluation of those deferred tax assets on the Company’s valuation allowance and included those amounts in the consolidated financial statements for the year ended December 31, 2017. The actual impact of the Tax Act may differ from the Company’s estimates due to, among other things, changes in interpretations and assumptions made and guidance that may be issued as a result of the Tax Act.
The components of loss before income taxes for the years ended December 31, 2017, 2016, and 2015, are presented below:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Domestic | | $ | (6,526,706 | ) | | $ | (5,950,862 | ) | | $ | (4,780,607 | ) |
Foreign | | (2,731,941 | ) | | (2,519,799 | ) | | (2,250,905 | ) |
Loss before income taxes | | $ | (9,258,647 | ) | | $ | (8,470,661 | ) | | $ | (7,031,512 | ) |
Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate for the years ended December 31, 2017, 2016, and 2015, primarily due to the following:
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Income tax benefit | | $ | (3,147,940 | ) | | $ | (2,880,025 | ) | | $ | (2,390,714 | ) |
State and provincial income tax, net of federal benefit | | (678,438 | ) | | (604,354 | ) | | (47,976 | ) |
Permanent differences | | (2,923 | ) | | 234,247 |
| | 158,207 |
|
US-Foreign rate differential | | 371,551 |
| | 359,729 |
| | (165,029 | ) |
Other, net | | (98,947 | ) | | 73,220 |
| | (11,125 | ) |
Effect of tax reform | | 3,687,844 |
| | — |
| | — |
|
| | 131,147 |
| | (2,817,183 | ) | | (2,456,637 | ) |
Change in valuation allowance | | (131,147 | ) | | 2,817,183 |
| | 2,456,637 |
|
Total income tax | | $ | — |
| | $ | — |
| | $ | — |
|
As of December 31, 2017, the Company has net domestic operating loss carryforwards of approximately $28.2 million to offset future federal taxable income, which begin to expire in 2019. The future utilization of the net operating loss and tax credit carryforwards, however, is subject to annual use limitations based on the change in stock ownership rules of Internal Revenue Code Sections 382 and 383. The Company experienced a change in ownership under these rules during 2012 and revised its calculation of net operating loss carryforwards based on annual limitation rules. The Company also has foreign net operating loss carryforwards in the amount of approximately $15.7 million and foreign research and development expense tax credits of approximately $2.8 million at December 31, 2017, which expire at various times commencing in 2018. Since the Company has incurred only losses from inception and there is uncertainty related to the ultimate use of the loss carryforwards and tax credits, a valuation allowance has been recognized to offset the Company’s deferred tax assets, and no benefit for income taxes has been recorded.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
| | | | | | | | |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss carryforwards | | $ | 12,411,425 |
| | $ | 12,844,999 |
|
Foreign research and development tax credit carryforwards | | 2,832,340 |
| | 2,428,094 |
|
Property and equipment | | 482,161 |
| | 412,283 |
|
Accounts receivable and other | | 270 |
| | 400 |
|
Stock options | | 40,071 |
| | 50,580 |
|
Accrued vacation | | 26,054 |
| | 34,107 |
|
Accrued compensation | | 58,131 |
| | — |
|
Intangible assets | | (110,899 | ) | | (162,057 | ) |
Total deferred tax assets | | $ | 15,739,553 |
| | $ | 15,608,406 |
|
Valuation allowance | | $ | (15,739,553 | ) | | $ | (15,608,406 | ) |
Net deferred tax assets | | $ | — |
| | $ | — |
|
The valuation allowance increased by $131,147 during 2017 and increased by $2,817,183 during 2016. The increase in 2017 is primarily due to increases in foreign research and development tax credits and property and equipment, offset by a reduction in net operating loss carryforwards resulting from the impact of tax reform.
The increase in 2016 was primarily due to an increase in deferred tax assets for net operating loss carryforwards and foreign tax credits.