(10) Income Taxes

The Company accounts for income taxes under the provisions of ASC 740. For the year ended December 31, 2016 the Company recorded a $0.1 million tax provision for foreign withholding taxes in connection with the $1.0 million upfront payment by CANbridge under the collaboration and license agreement entered into in March 2016. For the years ended December 31, 2015 and 2014, the Company did not have any federal, state, or foreign income tax expense as it generated taxable losses in all filing jurisdictions.

A reconciliation of the expected income tax benefit computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows for the years ended December 31, 2016, 2015 and 2014:

	Years Ended December 31,
	2016		2015		2014
Income tax computed at federal statutory tax rate	34.0%		34.0%		34.0%
State taxes, net of federal benefit	5.2%		5.3%		5.3%
Research and development credits	1.4%		2.0%		2.6%
Other permanent differences	6.1%		(2.0)%		(0.8)%
Foreign rate differential	(0.1)%		(0.1)%		—
Foreign withholding taxes	(0.4)%		—		—
SEC settlement liability	—		(9.1)%		—
Other	(6.6)%		(3.8)%		(5.7)%
Change in valuation allowance	(39.6)%		(26.3)%		(35.4)%
Total		—		—		—

Prior to 2011, the Company had incurred net operating losses from inception. At December 31, 2016, the Company had domestic federal, state, and UK net operating loss carryforwards of approximately $476.2 million, $366.9 million, and $6.7 million respectively, available to reduce future taxable income. The federal net operating loss carryforwards expire beginning in 2024 through 2036 and the state loss carryforwards begin to expire in 2030 and continue through 2036. The foreign net operating loss carryforwards in the UK do not expire. The Company also had federal and state research and development tax credit carryforwards of approximately $10.3 million and $4.2 million, respectively, available to reduce future tax liabilities and which expire at various dates. The federal credits expire beginning in 2023 through 2036 and the state credits expire beginning in 2019 through 2031. The net operating loss and research and development carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of certain changes in the ownership interest of significant stockholders.

The Company’s net deferred tax assets as of December 31, 2016 and 2015 are as follows (in thousands):

	2016		2015
NOL carryforwards	$	182,433	$	170,200
Research and development credits		13,060		12,721
Deferred revenue		867		1,451
Other temporary differences		4,570		5,935
Valuation allowance	(200,930)		(190,307)
Total	$	—	$	—

A full valuation allowance has been recorded in the accompanying consolidated financial statements to offset these deferred tax assets because the future realizability of such assets is uncertain. This determination is based primarily on the Company’s historical losses. Accordingly, future favorable adjustments to the valuation allowance may be required, if and when circumstances change. The valuation allowance increased by $10.6 million, $3.9 million and $18.6 million during the years ended December 31, 2016, 2015, and 2014, respectively, primarily due to the generation of net operating loss carryforwards.

As of December 31, 2016, the Company had federal and state net operating losses of approximately $4.1 million related to excess tax deductions that have been excluded from the above table. The benefit of these net operating losses will be recognized as an increase in additional paid in capital when it results in a reduction of taxes payable.

The Company applies FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109” (codified within ASC 740, Income Taxes), for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Unrecognized tax benefits represent tax positions for which reserves have been established. A full valuation allowance has been provided against the Company’s deferred tax assets, so that the effect of the unrecognized tax benefits is to reduce the gross amount of the deferred tax asset and the corresponding valuation allowance. Since the Company has incurred net operating losses since inception, it has never been subject to a revenue agent review. The Company is currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years ended 2013 through 2016. Carryforward tax attributes generated in years past may still be adjusted upon future examination if they have or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdictions for any tax years.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties have been recognized by the Company to date.

The Company anticipates that the amount of unrecognized tax benefits recorded will not change in the next twelve months.

The following is a reconciliation of the Company’s gross uncertain tax positions at December 31, 2016, 2015 and 2014:

	Years Ended December 31,
	2016		2015		2014
	(in thousands)
Amount established upon adoption	$	1,200	$	1,200	$	1,200
Additions for current year tax provisions		—		—		—
Additions for prior year tax provisions		—		—		—
Reductions of prior year tax provisions		—		—		—
Balance as of end of year	$	1,200	$	1,200	$	1,200