16. Income Taxes

During 2013, the Company realized a deferred tax benefit as a result of the transfer of intellectual property to the Company’s subsidiary, Epirus Biopharmaceuticals (Switzerland) GmbH, a Swiss Corporation. However, because the transfer is an intercompany transaction and is eliminated in consolidation, the Company cannot recognize a tax benefit. As a result, the deferred tax benefit of $943 related to the sale of intellectual property was deferred and was presented on the balance sheet as a deferred tax benefit at December 31, 2013. It is being recognized in earnings as the intellectual property asset is amortized in Switzerland over a period of five years, which is the expected tax amortization period for the intellectual property.

For the year ended December 31, 2015, the Company has recorded an income tax benefit of approximately $544, which is primarily due to a tax benefit of approximately $185 from the amortization of the Company’s deferred tax benefit related to the 2013 transfer of intellectual property described above and approximately $434 of in-process research & development impairment in Canada and offset by approximately $37 of withholding tax in Switzerland and $32 in income tax in the Netherlands.

The component of U.S. and foreign loss from continuing operations before income taxes are as follows:


	Year Ended December 31,
	2015		2014

United States	$	(6,145)	$	(16,149)
Foreign		(46,587)		(25,738)
Loss before income taxes:	$	(52,732)	$	(41,887)

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The Company’s deferred tax assets and liabilities are comprised of the following:


	As of December 31,
	2015		2014

Deferred tax assets
Current assets:
Accrued rent	$	-	$	208
Accrued expenses		-		539
Gross current deferred tax assets		-		747

Non-current assets:
Net operating loss - U.S.	$	14,261	$	11,660
Research and development credits		1,362		573
License/start-up expenditures		205		222
Accrued rent		125		111
Accrued expenses and other		642		—
Stock based compensation		941		147
Capitalized research and development/patent intangibles		4,645		5,611
Capitalized research and developmet RBIL Limitation		714		—
Foreign investment tax credit		—		4,370
Net operating loss - foreign		16,458		35,546
Gross non-current deferred tax assets	$	39,353	$	58,240
Gross Deferred tax assets	$	39,353	$	58,987

Deferred tax liabilities
Non-current:
Depreciation		(14)		(14)
Swiss IP amortization		(153)		(85)
Bioceros acquired intangibles		(757)		0
Identifiable intangible assets - IPR&D		-		(2,166)
Total non-current deferred tax liabilities	$	(924)	$	(2,265)
Gross deferred taxes	$	38,429	$	56,722
Valuation allowance		(39,077)		(58,888)
Net deferred tax liability	$	(648)	$	(2,166)

The Company has recorded a net deferred tax liability of $648 related to the acquired intangible assets, other accrual liabilities and deferred revenue in the Netherlands. The Company evaluated the positive and negative evidence bearing upon the realizability of the deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized in all jurisdictions except the Netherlands. The Netherlands is in a net deferred tax liability position as of December 31, 2015. The valuation allowance increase during the year ended December 31, 2015 is primarily due to the increase in the current year net operating losses offset by the disposition of Canadian deferred balances as a result of the Company’s sale of its Canadian entity.

A reconciliation of income tax expense 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		2014
Income tax benefit using U.S. federal statutory rate	$	(17,929)	$	(14,241)
State income taxes, net of federal benefit		(270)		(296)
Other permanent differences		(304)		2,985
Foreign rate differential		6,615		3,836
Tax credits		(795)		(223)
Other items		(811)		503
Tax benefit related to the IPR&D transfer		(185)		(185)
IPR&D impairment charge benefit		(434)		—
Foreign withholding taxes		37		101
Net change in valuation allowance		13,532		7,477
Income tax benefit	$	(544)	$	(43)

As of December 31, 2015 and 2014, the Company had U.S. federal net operating loss carryforwards of approximately $38.8 million and $31.0 million, respectively and state net operating loss carryforwards of approximately $27.6 million and $21.3 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2035. In addition, as of December 31, 2015 and 2014, the Company had foreign net operating loss carryforwards of approximately $82 million and $145 million, respectively, which may be available to offset future income tax liabilities. The decrease in foreign net operating losses is primarily due to the loss of net operating losses as a result of the Company’s sale of its Canadian entity offset by the current year loss in Switzerland. Net operating loss carryforwards are unlimited in the United Kingdom and Brazil, Switzerland allows for a seven year carryforward.

The Company had generated NOL carryforwards from stock-based compensation deduction in excess of expense recognized for financial reporting purposes (“excess tax benefit”). Excess tax benefits are realized when they reduce the taxes payable, as determined by using a “with and without” method, and are credited to additional paid-in capital, rather than a reduction of the income tax provision. As of December 31, 2015 and 2014, the Company had approximately $21 and $77 excess tax benefits, respectively, which will be credited to additional paid-in capital when realized.

As of December 31, 2015 and 2014, the Company had federal research and development tax credit carryforwards of approximately $1.2 million and $0.5 million, respectively, available to reduce future tax liabilities which expire at various dates through 2035. As of December 31, 2015 and 2014, the Company had state research and development tax credit carryforwards of approximately $0.2 million and $0.2 million, respectively, available to reduce future tax liabilities, which expire at various dates through 2030.

Under the provision 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 federal and state net operating loss carryforward and tax credit carryforward are net of the limitation due to Sections 382 and 383. A full valuation allowance has been provided against the net operating loss and tax credit carryforwards as of December 31, 2015.

For years through December 31, 2015, the Company generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.

The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2015 and 2014, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations and comprehensive loss.

The Company files income tax returns in the U.S., various state jurisdictions and foreign jurisdictions for its foreign subsidiaries. The federal and state income tax returns are generally subject to tax examinations for the tax years ended 2012 through 2015. The foreign income tax returns are generally subject to examinations for the tax years ended 2011 through 2015. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period. There are no currently ongoing or pending examinations in any jurisdiction.

During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The standard is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of the net current deferred tax asset of $109 and the net current deferred tax liability of $80 to the net non-current deferred tax liability in the Company’s consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively adjusted.