Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

8. Income Taxes

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, 2021 and 2020, the Company recognized an income tax expense less than $0.1 million.

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

	Years Ended December 31,
	2021			2020
Federal income tax at statutory federal rate		21.0	%		21.0	%
State taxes		4.9			6.4
Permanent differences		0.3			—
Stock-based compensation		0.1			—
Tax credits		0.1			(0.1	)
Recapture of tax credits		0.0			34.9
Other		1.3			(3.2	)
Change in valuation allowance		(27.8	)		(59.4	)
Total		(0.1	)%		(0.4	)%

The reconciliation of the Company’s effective tax rate to the statutory tax rate includes a reduction to the deferred tax asset for stock options that have been forfeited. The Company will no longer receive a tax deduction for these options in the future and as such the deferred tax asset has been reversed into income tax expense. An offsetting reduction to the valuation allowance has also been recorded.

Temporary differences that give rise to significant net deferred tax assets as of December 31, 2021 and 2020 are as follows:

	December 31,
(in thousands)	2021			2020
Deferred tax assets
Net operating losses	$	62,619		$	61,905
Capitalized research and development expenses		282			423
Credit carryforwards		167,498			167,501
Deferred compensation		1,993			1,890
Election out of installment method		956			820
Accrued expenses		44			124
Other temporary differences		672			720
Installment sale tax basis		15,869			15,869
Total gross deferred tax assets		249,933			249,252
Valuation allowance		(249,933	)		(249,252	)

At December 31, 2021, the Company had net operating loss carryforwards for federal and state income tax purposes of $209.5 million and $294.8 million, respectively. The Company's existing federal and state net operating loss carryforwards begin to expire in 2033. The Company also had available research and development credits for federal and state income tax purposes of approximately $28.8 million and $20.3 million, respectively. The federal and state research and development credits will begin to expire in 2022 and 2025, respectively. As of December 31, 2021, the Company also had available investment tax credits for state income tax purposes of less than $0.1 million which do not expire. The Company has orphan drug credits of $122.7 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 November 15, 2019 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 its tax attributes generated through November 15, 2019 as a result of the analysis. To the extent an ownership change has occurred after November 15, 2019 or 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.

As of December 31, 2021, 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, 2021 and 2020 was as follows:

(in thousands)	Balance at Beginning of Period		Additions		Deductions		Balance at End of Period
December 31, 2020		247,468		1,784		—		249,252
December 31, 2021		249,252		681		—		249,933

The change in the valuation allowance in the year ended December 31, 2021 primarily relates to the net operating loss deferred tax assets generated for the current year.