INCOME TAXES

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

5. INCOME TAXES

We recorded a benefit from income taxes of $8,000 in the year ended December 31, 2018. We made provisions for income taxes in the year ended December 31, 2017 of $0.5 million. The components of the provision for income taxes are as follows (in thousands):

	Year ended December 31,
	2018			2017
Current:
Federal		54			470
State		38			70
		92			540
Deferred:
Federal		(22	)		71
State		(78	)		(68	)
		(100	)		3
Provision for (benefit from) income taxes	$	(8	)	$	543

A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows:

	Year ended December 31,
	2018			2017
Federal statutory rate		21	%		34	%
Enactment of the Tax Cuts and Jobs Act		-			14
State rate, net of federal benefit		6			4
Tax credits		(26	)		(15	)
Permanent adjustments		1			-
FDII deduction		(4	)		-
Other		1			(2	)
Effective tax rate		(1	)%		35	%

Total income tax benefit for the year ended December 31, 2018 was $8,000. Income tax benefit for 2018 was based on: i) the U.S. statutory rate of 21%, ii) increased by state income taxes and permanent adjustments; and iii) reduced by Foreign-Derived Intangible Income (“FDII”) deduction and research tax credits.

Total income tax expense for the year ended December 31, 2017 was $0.5 million. Income tax expense for 2017 was based on: i) the U.S. statutory rate of 34%, ii) increased by the impact of the federal rate change on deferred tax assets due to enactment of the Tax Cuts and Jobs Act, iii) increased by state income taxes; and iv) reduced by research tax credits.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the then-current rate of 34% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. For the year ended December 31, 2017, this revaluation resulted in a provision of $0.4 million to income tax expense and a corresponding reduction in the deferred tax assets.

As of December 31, 2018 and 2017, we had deferred tax assets for which we had recorded no valuation allowance. The principal components of deferred tax assets were as follows at December 31 (in thousands):

	2018		2017
Depreciation	$	327	$	330
Stock compensation		87		103
Federal research and development credits		4,689		4,602
Other		68		36
Total		5,171		5,071
Less valuation allowance		(-)		(-)
Deferred tax assets, net	$	5,171	$	5,071

As of December 31, 2018, we had a total of $5.2 million of deferred tax assets for which we had recorded no valuation allowance. We have assessed the need for a valuation allowance on our deferred tax assets.  Based on our assessment of future sources of income, including reversing deferred tax liabilities, and future earnings, we have determined that it is more likely than not that the deferred tax assets will be realized, and therefore there is no valuation allowance required for the deferred tax assets. We will continue to assess the level of valuation allowance in future periods. Should evidence regarding the realizability of tax assets change at a future point in time, a valuation allowance will be required.

A rollforward of the uncertain tax position related to our research and development tax credits is as follows (in thousands):

Uncertain tax positions at December 31, 2016		1,032
Decrease due to positions taken in prior periods		(34	)
Uncertain tax positions at December 31, 2017		998
Decrease due to positions taken in prior periods		-
Uncertain tax positions at December 31, 2018	$	998

Uncertain tax positions of $0.8 million will impact our tax rate if realized. The difference between this amount and the total uncertain tax positions in the table above is the federal tax effect on state tax credits.

We adopted ASU 2016-09 in 2017 which was applied using a modified retrospective approach. Upon adoption, we recorded a deferred tax asset of $4.8 million with an offsetting adjustment to retained earnings related to excess stock compensation deductions that were not previously recorded as tax assets.

The tax years from 2015 through 2018 are subject to examination by the IRS and the tax years 2002 through 2018 are subject to examination by state tax authorities. In the second quarter of 2017, the Internal Revenue Service commenced an examination of our tax return for the year ended December 31, 2015. In February 2018, the IRS notified us that it had completed its examination and that it had no changes to our reported tax.