Income Taxes

12 Months Ended

Dec. 31, 2019

The income tax provision consists of the following (in thousands):



	Year Ended December 31,
	2019		2018
Current:
Federal	$	—	$	—
State	—		—
Foreign	—		—
	—		—
Deferred:
Federal	$	—	$	—
State	—		—
Foreign	—		—
	—		—
Total provision for income taxes	$	—	$	—

We did not record an income tax expense for 2019, 2018 and 2017. The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows:



	Year Ended December 31,
	2019		2018		2017
Federal statutory income tax rate	21.0	%	21.0	%	34.0	%
Federal and state credits	3.2	%	7.4	%	8.9	%
Excess tax benefit	0.3	%	0.4	%	8.6	%
Stock based compensation	(2.5	)%	(0.8	)%	0.1	%
U.S. tax on foreign earnings	(0.2	)%	—	%	—	%
Other	(0.5	)%	(0.6	)%	(0.1	)%
Tax impact due to tax rate reduction	—	%	—	%	(47.7	)%
Change in valuation allowance	(19.8	)%	(24.1	)%	2.6	%
Foreign rate differential	(1.5	)%	(3.3	)%	(6.4	)%
Total tax provision	0.0	%	0.0	%	0.0	%

The components of U.S. deferred tax assets and (liabilities) are as follows (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Federal and state net operating loss carryforwards	$	285,685		$	241,881
Federal and state research tax credit carryforwards	24,782			23,917
Federal Orphan Drug Credit	112,802			120,273
Deferred revenue	44,588			29,530
Stock options	20,893			19,992
Inventories	10,617			4,350
Operating lease liabilities	3,146			—
Other	7,861			5,098
Total deferred tax assets	510,374			445,041

Deferred tax liabilities:
Operating lease right-of-use assets	(2,793		)	—
Total deferred tax liabilities	(2,793		)	—

Net deferred tax assets before valuation allowance	507,581			445,041
Valuation allowance	(507,581		)	(445,041		)
Net deferred tax assets	$	—		$	—

We received orphan drug designation and were eligible to claim a federal orphan drug credit starting in 2015 and reported the credit in 2019, 2018, 2017, and 2016. On December 22, 2017, President Donald Trump signed into U.S. law the Tax Reform Act. The new law limits the orphan drug credit to 25% of qualified clinical testing expenses for the tax year effective for amounts paid or incurred in tax years beginning after 2017.

Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence, including the fact that we have incurred significant losses in almost every year since our inception, we believe it is more likely than not that our deferred tax assets are not recognizable. Accordingly, deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $62.5 million for the year ended December 31, 2019. The valuation allowance decreased by approximately $82.1 million for the year ended December 31, 2018.

As of December 31, 2019, we had net operating loss carryforwards for federal income tax purposes of approximately $1,225.5 million. Of the federal net operating loss carryforwards, $868.1 million will expire in the period from 2027 to 2037, and $357.4 million will carryforward indefinitely. We also have federal research tax credits of approximately $19.3 million and orphan drug credit of $132.7 million, which expire at various dates in the period from 2024 to 2039. Lastly, we have California net operating loss carry forwards of approximately $208.0 million which expire at various dates in the period from 2020 to 2039 and California research tax credits of approximately $12.0 million, which can be carried forward indefinitely. Our federal and state net operating loss carryforwards as of December 31, 2019 include amounts resulting from exercises and sales of stock option awards to employees and non-employees.

Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event that we had a change of ownership, utilization of the net operating loss and tax credit carryforwards may be limited under section 382.

Uncertain Tax Positions

We are subject to taxation in the United States. We have not been audited by the Internal Revenue Service or any state tax authority with the exception of State of Washington. We are no longer subject to audit by the Internal Revenue Service for income tax returns filed before 2017, and by the material state and local tax authorities for tax returns filed before 2016. However, carryforward tax attributes that were generated prior to these years may still be adjusted upon examination by tax authorities.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Unrecognized tax benefits, beginning of period	$	25,421		$	20,730		$	13,865
Increases due to current period positions	1,875			4,879			7,046
Increase due to prior period positions	22			26			—
Decreases due to prior period positions	(3,017		)	(214		)	(181		)
Unrecognized tax benefits, end of period	$	24,301		$	25,421		$	20,730

The amount of unrecognized income tax benefits that, if recognized, would affect our effective tax rate was $0 as of December 31, 2019 and December 31, 2018. If the $24.3 million and $25.4 million of unrecognized income tax benefits as of December 31, 2019 and 2018, respectively, is recognized, there would be no impact to the effective tax rate as any change will fully offset the valuation allowance. We do not expect that the unrecognized tax benefit will change within the next 12 months.

We recognize interest and penalties related to unrecognized tax benefits within income tax expense. Accrued interest and penalties are included within the related tax liability line in the accompanying consolidated balance sheets. Due to our net operating losses, we have not accrued any interest or penalty for any of our uncertain tax benefits as of December 31, 2019 and 2018.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax ACT") was enacted into law, which significantly changes existing U.S. tax law and includes many provisions applicable to us, such as reducing the U.S. federal statutory tax rate and adopting a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018.

The Tax Act also includes a provision referred to as Global Intangible Low-Taxed Income ("GILTI") which generally imposes a tax on foreign income in excess of a deemed return on tangible assets. The FASB guidance issued in January, 2018 allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the tax is incurred (the "period cost method"), or (ii) account for GILTI in the measurement of deferred taxes (the "deferred method"). We elect to account for the tax effects of this provision using the period cost method.

Our foreign entities started to have earnings in 2019 and our accumulated undistributed foreign earnings as of December 31, 2019 have been subject to the current year income inclusion under subpart F or GILTI regime for U.S. tax purposes. If we were to make actual distributions of some or all of these earnings, we would generally incur no additional U.S. income tax but could incur U.S. state income tax and foreign withholding taxes. We are evaluating whether future undistributed foreign earnings would be permanently re-invested or not and have not accrued for these potential U.S. state income tax and foreign withholding taxes. However, any additional tax associated with the distribution of these earnings would be immaterial.