On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely); modifying or repealing many business deductions and credits, including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”; and repeal of the federal Alternative Minimum Tax (“AMT”).

The staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In connection with the initial analysis of the impact of the TCJA, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company's deferred tax assets and liabilities was offset by a change in the valuation allowance. The Company finalized its accounting for the TCJA in the year ended December 31, 2018 with immaterial differences from the provisional amounts previously recorded.

The Company completed the Asset Sale and recorded the income tax implications of the sale in the second quarter of 2017. The Asset Sale generated taxable income for the Company, which has resulted in income tax expense. The Company released a portion of its valuation allowance in the year ended December 31, 2017, as it was able to utilize its net operating loss carryforwards to offset the taxable income generated from the Asset Sale. The Company’s current income tax expense for the year ended December 31, 2017 is $4.2 million, which is comprised of federal AMT of $0.3 million and state income tax of $3.9 million.

The Company received $28.0 million in milestone payments related to the Asset Sale during the year ended December 31, 2018. Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which there is pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, the Company must allocate to continuing operations an income tax benefit for the loss in continuing operations with an offsetting income tax expense to discontinued operations. For the years ended December 31, 2018 and 2017, the Company recognized an income tax benefit of $7.7 million and $42.4 million, respectively, in continuing operations and income tax expense in discontinued operations of $7.6 million and $46.6 million, respectively.

The Company’s current income tax benefit for the year ended December 31, 2018 is $0.1 million, which is comprised of $0.4 million of federal and state income tax expense associated with the additional milestones received and an offsetting tax benefit of $0.5 million related to an AMT credit refund.

A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:

	Years Ended December 31,
	2018			2017
Federal income tax at statutory federal rate		21.0	%		35.0	%
State taxes		6.2			1.7
Permanent differences		(0.1	)		(3.0	)
Stock-based compensation		(0.4	)		(7.2	)
Tax Cuts and Jobs Act Impact		0.1			(19.9	)
Tax credits		2.5			11.6
Change in deferred state tax rate		—			7.7
Other		—			0.3
Change in valuation allowance		(18.1	)		9.9
Total		11.2	%		36.1	%

Temporary differences that give rise to significant net deferred tax assets as of December 31, 2018 and 2017 are as follows:

	December 31,
(in thousands)	2018			2017
Deferred tax assets
Net operating losses	$	54,407		$	43,133
Capitalized research and development expenses		705			847
Credit carryforwards		166,367			164,709
Depreciation		2,725			2,605
Deferred compensation		6,315			5,855
Accrued expenses		655			905
Other temporary differences		2,423			2,145
Installment sale tax basis		14,881			15,868
Total gross deferred tax assets		248,478			236,067
Valuation allowance		(248,478	)		(236,067	)

At December 31, 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of $179.7 million and $263.9 million, respectively. The Company's existing federal and state net operating loss carryforwards begin to expire in 2031. The Company also had available research and development credits for federal and state income tax purposes of approximately $28.8 million and $18.9 million, respectively. The federal and state research and development credits will begin to expire in 2022 and 2025, respectively. As of December 31, 2018, the Company also had available investment tax credits for state income tax purposes of $0.1 million, which began to expire in 2019. The Company has orphan drug credits of $122.5 million, which begin to expire in 2031.

Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income and tax. The Company completed an evaluation of ownership changes through December 31, 2017 to assess whether utilization of the Company’s net operating loss or tax credit carryforwards would be subject to an annual limitation under Section 382 of the Internal Revenue Code. The Company believes it can utilize all of its existing tax attributes as a result of the analysis. The Company has not performed an evaluation of ownership changes since December 31, 2017. To the extent an ownership change occurs in the future, the net operating loss and tax credit carryforwards may be subject to limitation.

The Company has not, as of yet, conducted a study of its domestic research and development credit carryforwards and orphan drug credits. This study may result in an increase or decrease to the Company's 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 credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. As a result, there would be no impact to the statement of operations and comprehensive loss, balance sheet or cash flows if an adjustment were required.

In the second quarter of 2017, when the Asset Sale was consummated, the Company determined that it would utilize a portion of its deferred tax assets to offset the income generated from the Asset Sale and released a portion of its valuation allowance. As of December 31, 2018, the Company has evaluated the positive and negative evidence bearing upon the realizability of its remaining deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company's history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of its deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets. The change in the valuation allowance against the deferred tax assets in the years ended December 31, 2018 and 2017 was as follows:

(in thousands)

Balance at

Beginning

of Period

Additions

Deductions

Balance at

End of

Period

December 31, 2017

414,558

66,801

(245,292

)

236,067

December 31, 2018

236,067

12,411

—

248,478

The change in the valuation allowance in in the year ended December 31, 2018 primarily relates to the net operating loss deferred tax assets generated for the current year.