14. INCOME TAXES

For the years ended December 31, 2016 and 2015, the Company did not record a current or deferred income tax expense or (benefit) due to current and historical losses incurred by the Company. The Company's losses before income taxes consist solely of domestic losses.

The Company has early adopted the provisions of ASU 2016-09, Compensation – Stock Compensation (Topic 718 Improvements to Employee Share-Based Payment Accounting), for its year ended December 31, 2016. ASU 2016-09 requires companies to include the benefit of an option deduction in its net operating loss carryforward deferred tax asset. Prior to its adoption of ASU 2016-09, the Company’s excess tax benefits associated with option deductions were maintained in the Company’s APIC pool of windfall tax benefits, which was tracked off balance sheet and not included in its deferred tax assets. As a result of the Company’s adoption of ASU 2016-09, it will track option deductions in its net operating loss deferred tax asset on a modified retrospective basis, and has included the option deductions in the December 31, 2016 deferred tax assets. The gross deferred tax asset and valuation allowance as of December 31, 2016 increased $406 as a result of the cumulative effect of adoption of ASU 2016-09. The Company has not recast its December 31, 2015 and December 31, 2014 deferred tax assets or its rate reconciliation, and therefore the option deductions in 2015 and 2014 are not included in the net operating loss deferred tax asset as originally reported. Since the Company has historically maintained a full valuation allowance on its net worldwide deferred tax asset, there is no net impact to retained earnings from the adoption of ASU 2016-09.

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


	As of December 31,
	2016		2015		2014
Federal income tax expense at statutory rate	34.00	%	34.00	%	34.00	%
(Increase) decrease income tax (benefit) resulting from:
State income tax, net of federal benefit	3.43		5.29		—
Permanent differences	(1.45)		(1.70)		(0.17)
Research and development credit	0.27		0.89		3.74
Change in valuation allowance	(36.25)		(38.48)		(37.57)
Effective income tax rate	0.00	%	0.00	%	0.00	%

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


	As of December 31,
	2016		2015
Deferred tax assets:
U.S. and state net operating loss carryforwards	$	71,049	$	38,405
Research and development credits		3,712		3,421
Accruals and other		1,541		144
Depreciation and amortization		261		94
Total deferred tax assets		76,563		42,064
Valuation allowance		(76,563)		(42,064)
Net deferred tax assets	$	—	$	—

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As of December 31, 2016 and 2015, based on the Company's history of operating losses, the Company has concluded that it is not more likely than not that the benefit of its deferred tax assets will be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2016 and 2015. The valuation allowance increased $34,499 and $10,539, during the years ended December 31, 2016 and 2015 respectively, due primarily to net operating losses generated.

As of December 31, 2016, 2015 and 2014, the Company had U.S. federal net operating loss carryforwards of $190,926, $104,888 and $78,276, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2036. As of December 31, 2016, 2015, and 2014, the Company also had U.S. state net operating loss carryforwards of $145,902, $59,875, and $34,184 respectively, which may be available to offset future income tax liabilities and expire at various dates through 2036. Included in the federal and state net operating loss carryforwards are approximately $1,539, $1,064, and $0, respectively, of deductions related to the exercise of stock options. As stated above, the company is electing to early adopt ASU 2016-09 on a modified retrospective basis. Therefore, the $1,539 of option deductions is included in the company’s net operating loss deferred tax asset at December 31, 2016. The company is not recasting its net operating loss deferred tax asset at December 31, 2015 and December 31, 2014, and therefore the option deduction of $1,064 and $0, respectively, is not included in the Company’s deferred tax assets.

As of December 31, 2016, 2015 and 2014, the Company had federal research and development tax credit carryforwards of approximately $3,367, $3,110, and $2,868, respectively, available to reduce future tax liabilities which expire at various dates through 2036. As of December 31, 2016, 2015 and 2014 the Company had state research and development tax credit carryforwards of approximately $522, $469 and $226, respectively, available to reduce future tax liabilities which expire at various dates through 2031.

Under the provisions 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 percent, 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 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 Company has completed numerous financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future.

For all years through December 31, 2016, 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 for these two years. 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 files income tax returns in the United States and in several states. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2013 through December 31, 2016. 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 or state tax authorities to the extent utilized in a future period.