11. INCOME TAXES

On August 6, 2018, ANI Canada acquired all the issued and outstanding equity interests of WellSpring in a non-taxable transaction (Note 2). Following the consummation of the transaction, WellSpring was merged into ANI Canada. For U.S. Federal and state income tax purposes, ANI Canada is not part of ANI’s consolidated group; rather, ANI Canada is subject to income taxes only in Canada and solely based on its stand-alone operations. The foreign current and foreign deferred provisions (benefits) below represent ANI Canada’s tax provision (benefit) from the Canadian taxing jurisdictions.

We are required to establish a valuation allowance for deferred tax assets 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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the projected future taxable income and tax planning strategies in making this assessment. As of December 31, 2018, we had provided a valuation allowance against our consolidated net deferred tax assets of $2.2 million.

As part of purchase accounting, as of the August 6, 2018 acquisition date the Company established net deferred tax assets relating to differences in the book bases (determined based on fair value purchase accounting) and tax bases (determined based on the carryover nature of the nontaxable transaction) of ANI Canada’s assets and liabilities of approximately $1.9 million, offset by a full valuation allowance due to our determination that it was more likely than not that all of the deferred tax assets will not be realized. During the second quarter 2019, we adopted an intercompany transfer pricing policy that uses the “comparable profits method” for pricing intercompany services between ANI Pharmaceuticals, Inc. and ANI Canada. For U.S. and Canadian tax purposes, the policy was adopted in conjunction with the acquisition date of August 6, 2018. As a result of the newly adopted transfer pricing policy, our assessment of the amount of ANI Canada’s deferred tax assets that are more likely than not to be realized changed and, as a result, during the second quarter 2019, we relased the remaining net valuation allowance related of ANI Canada’s deferred tax assets.

As of December 31, 2019, our consolidated valuation allowance was $0.4 million, related solely to deferred tax assets for net operating loss carryforwards in certain U.S. state jurisdictions.

Our total provision for income taxes consists of the following for the years ended December 31, 2019, 2018, and 2017:


(in thousands)	2019		2018		2017
Current income tax provision:
Federal	$	4,985	$	7,985	$	13,175
State		1,212		1,751		690
Total		6,197		9,736		13,865
Deferred income tax (benefit)/provision:
Federal		(6,274)		(4,630)		4,065
State		(2,027)		(556)		(556)
Foreign		1,000		(214)		—
Total		(7,301)		(5,400)		3,509
Change in valuation allowance		(1,833)		221		51
Total (benefit)/provision for income taxes	$	(2,937)	$	4,557	$	17,425

The difference between our expected income tax provision from applying U.S. Federal statutory tax rates to the pre-tax income and actual income tax provision relates primarily to the effect of the following:


	As of December 31,
	2019		2018		2017
US Federal statutory rate	21.0	%	21.0	%	35.0	%
State taxes, net of Federal benefit	3.2	%	2.4	%	2.0	%
Foreign taxes	0.4	%	26.5	%	—	%
Impact of Tax Cuts and Jobs Act	—	%	—	%	81.9	%
Domestic production activities deduction	—	%	—	%	(8.8)	%
Change in valuation allowance	(58.1)	%	(26.5)	%	—	%
Stock-based compensation	(6.7)	%	(1.8)	%	0.8	%
Non-deductible costs	9.1	%	—	%	0.5	%
Change in state apportionment factors, state and foreign rates	(28.1)	%	—	%	—	%
Research and experimentation and charitable credits	(33.5)	%	—	%	(2.5)	%
Transfer pricing and other	(0.2)	%	1.1	%	(2.3)	%
Total income tax (benefit)/provision	(93.0)	%	22.7	%	106.6	%

In 2017 our effective tax rate was impacted by the revaluation of our deferred tax assets and liabilities at the lower 21% U.S. corporate tax rate, as proscribed by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 and lowered the U.S. corporate tax rate from 35% to 21%, which began in 2018. We measure our deferred tax assets and liabilities using the tax rates that we believe will apply in the years in which the temporary differences are expected to be recovered or paid. As a result, we remeasured our deferred tax assets and deferred tax liabilities to reflect the reduction in the enacted U.S. corporate income tax rate, resulting in a net $13.4 million increase in income tax expense for the year ended December 31, 2017.

Deferred income taxes reflect the net tax effects of differences between the bases of assets and liabilities for financial reporting and income tax purposes. Our deferred income tax assets and liabilities consisted of the following:


	As of December 31,
(in thousands)	2019		2018
Deferred tax assets:
Accruals and advances	$	8,586	$	7,748
Stock-based compensation		3,750		—
Bond hedge		—		3,019
Accruals for chargebacks and returns		7,603		7,132
Inventory		4,720		1,228
Intangible asset		14,923		9,393
Net operating loss carryforwards		4,767		5,604
Other		1,459		4,682
Total deferred tax assets	$	45,808	$	38,806
Deferred tax liabilities:
Depreciation	$	(6,029)	$	(4,437)
Debt discount		—		(1,316)
Intangible assets		(13)		(11)
Other		(1,008)		(2,813)
Total deferred tax liabilities	$	(7,050)	$	(8,577)
Valuation allowance		(432)		(2,265)
Deferred tax assets, net of deferred tax liabilities and valuation allowance	$	38,326	$	27,964

As of December 31, 2019, we had U.S. federal net operating loss carryforwards of approximately $11.3 million, all of which arose as a result of the Merger and, if not used, expire in annual increments through 2033. The utilization of the net operating loss carryforwards are limited in future years as prescribed by Section 382 of the U.S. Internal Revenue Code; our current annual limitation of the federal net operating loss is approximately $0.8 million per year. Additionally, as of December 31, 2019 we have total net operating losses in Canada of $7.9 million that begin expiring in 2035.

We are subject to income taxes in numerous jurisdictions in the U.S. and in Canada. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. We establish liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these liabilities in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of changes to the liability that is considered appropriate. We identified no material uncertain tax positions as of December 31, 2019 and 2018.

We are subject to income tax audits in all jurisdictions for which we file tax returns. Tax audits by their nature are often complex and can require several years to complete. Neither ANI Pharmaceuticals, Inc. nor any of its subsidiaries is currently under audit in any jurisdiction. All of our income tax returns remain subject to examination by tax authorities due to the availability of net operating loss carryforwards.