11. Income Taxes

The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017 and became effective January 1, 2018. The TCJA had significant changes to U.S. tax law, lowering U.S. corporate income tax rates, implementing a territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and modified the taxation of other income and expense items. The TCJA reduced the U.S. corporate income tax rate from 34% to 21%, effective January 1, 2018.

Loss before income taxes is allocated as follows (in thousands):


	Year Ended December 31,
	2019		2018
U.S. operations	$	18,544	$	7,855
Foreign operations		35,577		28,871
Loss before income taxes	$	54,121	$	36,726

As of December 31, 2019 and 2018, we had approximately $143.7 million and $131.6 million, respectively, of net operating loss (NOL) carry forwards available to offset future federal and state taxable income that will expire beginning in 2023. We also have federal research and development credit carryovers of approximately $8.4 million and state credit carryovers of approximately $0.4 million, which expire beginning in 2020.

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, or the Code, as well as similar state tax provisions. This could limit the amount of NOLs that we can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of our company immediately prior to an ownership change. Subsequent ownership changes may further affect the limitation in future years. In addition, U.S. tax laws limit the time during which these carry forwards may be applied against future taxes, therefore, we may not be able to take full advantage of these carry forwards for federal income tax purposes. We have not evaluated the ownership history of our company to determine if there were any ownership changes as defined under Section 382(g) of the Code and the effects any ownership change may have had.

The components of the net deferred tax asset are as follows (in thousands):


	December 31,
	2019		2018
Gross deferred tax assets:
Net operating loss carryforwards	$	40,120	$	36,383
Accrued expenses		200		52
Contributions		4		3
Depreciation		42		—
Stock‑based compensation		2,967		1,640
Research and development and other credits		9,118		6,545
Total gross deferred tax assets	$	52,451	$	44,623
Gross deferred tax liabilities:
Depreciation		—		(18)
Total gross deferred tax liabilities		—		(18)
Net deferred tax assets		52,451		44,605
Less: valuation allowance		(52,451)		(44,605)
Net deferred tax assets after valuation allowance	$	—	$	—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2019 and 2018. The valuation allowance increased by $7.8 million and $2.0 million during the years ended December 31, 2019 and 2018, respectively. The increase in both years was due primarily to our increase in net operating loss carryovers.

We did not have unrecognized tax benefits as of December 31, 2019 and 2018, and do not expect this to change significantly over the next twelve months. We recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. Accrued interest and penalties, where appropriate, are recorded in income tax expense. We did not have uncertain tax positions as of December 31, 2019 and 2018. As of December 31, 2019 and 2018, we have not accrued interest or penalties related to any uncertain tax positions.

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:


	Year Ended December 31,
	2019		2018
Federal income tax expense at statutory rate	21.0	%	21.0	%
Permanent items	(1.0)		(0.9)
State income tax, net of federal benefit	2.3		0.1
R&D tax credits	4.4		4.3
Change in state apportionment	1.1		(1.1)
Foreign income tax effect	(13.8)		(16.5)
Other	0.5		(1.6)
Change in valuation allowance	(14.5)		(5.3)
Effective income tax rate	0.0	%	0.0	%

For all years through December 31, 2019, we generated research and development credits but have not conducted a study to document the qualified activities. This study may result in an adjustment to our 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 years. A full valuation allowance has been provided against our research and development credits and, if an adjustment is required, this adjustment to the deferred tax asset established for the research and development credit carryforwards would be offset by an adjustment to the valuation allowance.

We file income tax returns in the United States, the State of Connecticut, and the Commonwealth of Pennsylvania. The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2016 through December 31, 2018. To the extent we have 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.