Income taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; limitations on the deductibility of certain executive compensation; and changes to the calculation of the orphan drug credit.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which addresses situations where the accounting is incomplete for the income tax effects of the Tax Act. SAB 118 directs taxpayers to consider the impact of the Tax Act as “provisional” when the Company does not have the necessary information available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law. Companies are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated as of December 31, 2017.
With regards to the Tax Act impact on the tax provision as it relates to the Company for the year ended December 31, 2017, the Company has recognized the provisional impact of tax reform related to the revaluation of deferred tax assets and liabilities from 35% to 21% of $44.9 million of tax expense, which is offset by a reduction in the valuation allowance.
As a result of changes made by the Tax Act, starting with executive compensation paid in 2018, Section 162(m) of the Internal Revenue Code will limit the Company from deducting compensation, including performance-based compensation, in excess of $1 million paid to certain executives. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. The Company has not yet completed an analysis of the binding contract requirement on the various compensation plans to determine the impact of the law change that may affect its deferred tax asset for stock compensation.
With regards to the one-time transition tax, the Company did not record any tax liability as it believes that the accumulated earnings and profits of foreign subsidiaries will be in a deficit position. Because of the complexity of the new international tax provisions included in the Tax Act that are not applicable to the Company until 2018, and the Company's recent international expansion, the Company is continuing to evaluate these provisions of the Tax Act and the application of ASC 740, Income Taxes.
The Company will continue to refine its calculations as additional analysis is completed related to the Tax Act. Additional information that may affect its provisional amounts would include further clarification and guidance on how the IRS will implement tax reform, including guidance with respect to the above, further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on its state income tax returns, completion of its 2017 tax return filings, and the potential for additional guidance from the SEC or the FASB related to tax reform. The accounting is expected to be completed when the Company's 2017 U.S. corporate income tax return is filed in 2018.
Loss before income taxes attributable to domestic and international operations, consists of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 |
Domestic | $ | (47,125,778 | ) | | $ | (122,809,629 | ) | | $ | (239,300,526 | ) |
Foreign | — |
| | (842,898 | ) | | (15,144,487 | ) |
Loss before income taxes | $ | (47,125,778 | ) | | $ | (123,652,527 | ) | | $ | (254,445,013 | ) |
Income tax expense (benefit) consists of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 |
Current tax: | | | | | |
Domestic | $ | — |
| | $ | — |
| | $ | — |
|
Foreign | — |
| | — |
| | 110,305 |
|
Deferred tax: | | | | | |
Domestic | — |
| | — |
| | — |
|
Foreign | — |
| | — |
| | (1,073,346 | ) |
Total income tax benefit | $ | — |
| | $ | — |
| | $ | (963,041 | ) |
A reconciliation of income tax benefit computed at the statutory federal income tax rate to income taxes as reflected in the financial statements is as follows:
|
| | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 |
Federal income tax benefit at statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
State and local tax, net of federal benefit | 8.0 |
| | 10.4 |
| | 10.3 |
|
Permanent differences | (2.7 | ) | | 3.1 |
| | (0.3 | ) |
Tax credits | 13.1 |
| | 9.1 |
| | 9.2 |
|
Tax Cuts and Jobs Act impact | — |
| | — |
| | (17.6 | ) |
Foreign rate differential | — |
| | (0.1 | ) | | (1.3 | ) |
Change in valuation allowance | (52.4 | ) | | (56.5 | ) | | (33.9 | ) |
Effective income tax rate | — | % | | — | % | | 0.4 | % |
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes and for net operating loss and tax credit carryforwards. The significant components of the Company’s deferred tax assets are comprised of the following:
|
| | | | | | | |
| December 31, |
| 2016 | | 2017 |
Deferred tax assets (liabilities): | | | |
Net operating loss carryforwards | $ | 55,710,846 |
| | $ | 114,152,143 |
|
Tax credit carryforwards | 28,327,477 |
| | 51,585,618 |
|
Stock-based compensation | 10,342,547 |
| | 14,643,667 |
|
Deferred rent | 3,356,430 |
| | 4,697,221 |
|
Deferred revenue | 4,057,998 |
| | 956,071 |
|
Accruals and other | 9,262,530 |
| | 8,997,857 |
|
| | | |
Total deferred tax assets | 111,057,828 |
| | 195,032,577 |
|
Less valuation allowance | (107,616,937 | ) | | (193,795,798 | ) |
| | | |
Net deferred tax assets | $ | 3,440,891 |
| | $ | 1,236,779 |
|
| | | |
Intangible assets | $ | (1,936,250 | ) | | $ | — |
|
Fixed assets | (2,504,876 | ) | | (1,236,779 | ) |
Total deferred tax liabilities | $ | (4,441,126 | ) | | $ | (1,236,779 | ) |
| | | |
Net deferred tax liability | $ | (1,000,235 | ) | | $ | — |
|
As of December 31, 2017, the Company had U.S. federal net operating loss carryforwards of $331.0 million, which may be available to offset future income tax liabilities and will expire beginning in 2034. As of December 31, 2017, the Company also had U.S. state net operating loss carryforwards of $342.8 million, which may be available to offset future income tax liabilities and will expire beginning in 2034.
The Company has recorded a full valuation allowance against its net deferred tax assets as of December 31, 2017 and 2016, respectively, because the Company has determined that is it more likely than not that these assets will not be fully realized due to historic net operating losses incurred. The Company experienced a net change in valuation allowance of $73.8 million and $86.2 million in the years ended December 31, 2016 and 2017, respectively.
As of December 31, 2017, the Company had federal research and development and orphan drug tax credit carryforwards of $46.9 million and $4.6 million, respectively, available to reduce future tax liabilities, which expire beginning in 2034.
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 shareholders 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 financing 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 files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and foreign jurisdictions, where applicable. The company’s tax years are still open under status from 2014 to present. All open years maybe be examined to the extent that tax credit or net operating loss carryforward are used in future periods. The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations.