9. Income Taxes

The Company accounts for income taxes under FASB ASC 740 (“ASC 740”). Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Income taxes have been based on the following income (loss) before income tax expense:


	December 31,
	2018		2017
Domestic	$	(20,579,000)	$	(24,131,000)
Foreign		45,000		52,000
	$	(20,534,000)	$	(24,079,000)

The provision for income taxes consists of the following:


	December 31,
	2018		2017
Current
US Federal	$	—	$	—
State and Local		—		—
Foreign		13,000		13,000
Total Current	$	13,000	$	13,000
Deferred
US Federal	$	(137,000)	$	—
State and Local		—		—
Foreign		—		—
Total Deferred	$	—	$	—
Total (Benefit) Expense	$	(124,000)	$	13,000

As of December 31, 2018, the Company had federal net operating loss (“NOL”) carry forwards of $231,950,000, state NOL carry forwards of $187,950,000 and research and development tax credit carry forwards of $82,335,000, which may be available to reduce future taxable income. There are $210,490,000 of federal NOLs that were generated in tax periods prior to 2018 that will begin to expire at various dates starting in 2022 and ending in 2044. The NOL that was generated in 2018 of $21,460,000 will carry forward indefinitely and not expire pursuant to changes in tax laws but will be limited in a single tax year to 80 percent of federal taxable income. The state NOL carry forwards will begin to expire at various dates starting in 2025. The NOL carry forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carry forwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. This will likely limit the amount of US NOLs, tax credit and tax attribute carryforwards that the Company can utilize to offset future taxable income or tax liabilities. The Company will complete a full Section 382 and 383 analysis prior to any utilization of any NOL and tax credit carry forwards. The amount of the annual limitation, if any, will be 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’s reserves related to taxes are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized. The Company recognized no material adjustment for unrecognized income tax benefits. Through December 31, 2018, the Company had no unrecognized tax benefits or related interest and penalties accrued.

The principal components of the Company’s deferred tax assets are as follows:


	December 31,
	2018		2017
Deferred tax assets:
Net operating loss carryovers	$	63,494,000	$	57,557,000
R&D tax credits		82,246,000		79,725,000
Non-qualified stock options		4,611,000		5,355,000
Deferred revenue		1,175,000		1,242,000
Charitable contributions		4,000		4,000
Accrued expenses		454,000		407,000
Fixed assets		92,000		85,000
Deferred tax assets		152,076,000		144,375,000
Less valuation allowance		(151,939,000)		(144,375,000)
Net deferred tax assets	$	137,000	$	—

ASC 740 requires a valuation allowance to reduce the deferred tax assets reported 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. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its deferred tax assets at December 31, 2018 and 2017, respectively, except for the refundable AMT credit. The Company experienced a net change in valuation allowance of $7,564,000 and $(13,434,000) for the years ended December 31, 2018 and 2017, respectively.

A reconciliation of income tax (expense) benefit at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows:


	December 31,
	2018		2017
Federal income tax expense at statutory rate	21.0	%	34.0	%
Permanent items	1.4		(8.1)
Effect of Tax Act	—		(116.9)
State income tax, net of federal benefit	6.9		5.8
Tax credits	12.2		29.3
Provision to return	—		—
Change in valuation allowance	(36.6)		55.8
Other	(4.3)		—
Effective income tax rate	0.6	%	(0.1)	%