Income Taxes

12 Months Ended

Dec. 31, 2019

10. Income Taxes

At December 31, 2019, the Company had federal net operating loss (“NOL”) carryforwards of approximately $64.2 million available to reduce future taxable income,

which

$40.4 million will

expire between 203

and 2037. The Company also has state operating loss carryforwards of approximately $52.9 million, available to reduce future taxable income, which expire between 2031

nd 203

. The Company has unused federal research and development carryforwards of approximately $5.9 million which will begin to expire in 203

The Internal Revenue Code (“IRC”) limits the amounts of NOL carryforwards that a Company may use in any one year in the event of certain cumulative changes in ownership over a three-year period as described in Section 382 of the IRC. Such change in ownership could limit the Company’s utilization of the NOL, and could be triggered by subsequent sales of securities by the Company or stockholders. The deferred tax asset related to the NOL reflected on the financial statements could be affected by this limitation. Although a formal analysis has not been completed, the Company has determined that an ownership change likely occurred for Madrigal during the year ended December 31, 2017. The net operating losses are expected to be subject to an annual limitation; however, none of these NOLs is expected to expire before becoming available to reduce future taxable income.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion 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. As there is no assurance of future taxable income, a full valuation allowance has been established to offset the deferred tax assets. The valuation allowance increased $26.8 million for the year ended December 31, 2019. Changes in the deferred tax asset will be recorded as an income tax benefit or expense on the accompanying consolidated statements of operations.

Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2019 there were no uncertain positions. The 2013 through 2018 tax returns are open to review by the IRS and state taxing authorities. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. There was no income tax related interest and penalties included in the income tax provision for 2019.

Temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):


	For the years ended December 31,
	2019		2018		2017
Deferred Tax Liabilities
Unrealized gains on investments	$	62	$	—	$	—
Total deferred tax liabilities	$	62	$	—	$	—
Deferred Tax Assets
Charitable contributions	$	15	$	13	$	4
Accrued expenses		759		498		421
Intangibles		983		477		579
Stock compensation		10,943		4,395		605
Property, plant & equipment		13		9		—
Unrealized loss on investment		—		92		9
Net operating losses		17,635		14,851		9,229
Capitalized R&D		29,364		15,108		8,671


	For the years ended December 31,
	2019			2018			2017
R&D credit	$	6,141		$	3,505		$	1,901

Total deferred tax assets before valuation allowance		65,853			38,948			21,419
Valuation allowance		(65,791	)		(38,948	)		(21,419	)

Total deferred tax assets		62			—			—

Net deferred tax assets	$	—		$	—		$	—

Differences between the effective income tax rate and the US statutory rate were as follows (in thousands):


	For the years ended December 31,
	2019			2018			2017
Tax benefit at U.S. federal statutory rate	$	(17,629	)	$	(6,890	)	$	(10,592	)
Stock based compensation		(47	)		(3,415	)		138
Effect of tax reform, change in federal tax rate		—			—			9,260
Other n ondeductible e xpenses		14			—			1
State income taxes benefit before valuation allowance, net of federal benefit		(6,613	)		(5,460	)		(704	)
Increase in domestic valuation allowance		26,843			17,529			2,880
Research and development credit		(2,636	)		(1,604	)		(825	)
Other adjustments		68			(160	)		(158	)

Income tax expense (benefit)	$	—		$	—		$	—