Income Taxes

The provision for income taxes is based on net loss before income taxes as follows:



	DECEMBER 31,
(in thousands)	2015			2014			2013
Net loss before income taxes:
United States	$	(59,211	)	$	(48,133	)	$	(31,148	)
Other	(15,013		)	—			—
Net loss before income taxes	$	(74,224	)	$	(48,133	)	$	(31,148	)

The components of the provision for income taxes are as follows:
	DECEMBER 31,
(dollars in thousands)	2015			2014			2013
Provision for income taxes:
Current:
United States	$	139		$	—		$	—
Other	—			—			—
Total	$	139		$	—		$	—
Deferred:
United States	$	—		$	—		$	—
Other	—			—			—
Total	—			—			—
Provision for income taxes	$	139		$	—		$	—
Effective tax rate	(0.19		)%	—		%	—		%

Significant components of the Company’s net deferred income tax assets as of December 31, 2015 and 2014 consist of the following:



	DECEMBER 31,
(in thousands)	2015			2014
Net deferred tax assets:
Net operating loss carry-forwards	$	6,335		$	42,863
Share based compensation	7,231			3,249
U.S. tax credit carry-forwards	3,823			631
Other assets	1,488			1,633
Other liabilities	(696		)	(693		)
Valuation allowance	(18,181		)	(47,683		)
Total net deferred income taxes	$	—		$	—

A reconciliation of the statutory tax rates and the effective tax rates for the years ended December 31, 2015, 2014 and 2013 is as follows:



	DECEMBER 31,
	2015		2014		2013
U.S. federal tax rate	35.00	%	35.00	%	35.00	%
State income taxes, net of federal benefit	(0.90	)%	6.13	%	5.36	%
Taxable gain resulting from IP Assignment	(75.31	)%	—	%	—	%
Non-taxable foreign loss	(6.98	)%	—	%	—	%
Tax deferral from IP Assignment	3.56	%	—	%	—	%
Other	0.02	%	(0.04	)%	(0.03	)%
Valuation allowance	44.42	%	(41.09	)%	(40.33	)%
Effective tax rate	(0.19	)%	—	%	—	%

In January 2015, the Company participated in the New Jersey Economic Development Authority’s Sponsored Technology Business Tax Certificate Transfer Program to transfer $3.1 million in state tax benefits to unrelated profitable businesses with operations in the state of New Jersey. The Company received net proceeds of $2.9 million from the transfer.

The IP Assignment resulted in the recognition of a taxable gain for U.S. federal and state income tax purposes. As of December 31, 2015, the estimated income tax liability was $1.7 million after utilization of net operating loss carry-forwards, current year losses generated through December 31, 2015 and quarterly estimated payments made through December 31, 2015. Under ASC 810, Consolidation, the income tax expense of $2.8 million for the year ended December 31, 2015 was recorded as a prepaid asset. In accordance with ASC 810, Consolidation, the estimated prepaid asset will be amortized into income tax expense over the estimated remaining patent life of the intellectual property subject to the IP Assignment, through approximately 2030. For the year ended December 31, 2015, the Company recognized $139,000 of income tax expense related to the amortization of the prepaid asset.

Largely as a result of the IP Assignment, the Company reversed approximately $29.5 million of its valuation allowance on certain deferred tax assets, primarily federal and state net operating losses, as of December 31, 2015. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carry-forward period. Due to the Company’s history of operating losses and lack of available evidence supporting future taxable income, the Company believes that a valuation allowance on its remaining deferred tax assets as of December 31, 2015 remains appropriate.

In addition, the IP Assignment is subject to complex tax and transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with the Company’s determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and the Company’s position were not sustained, the Company could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows than otherwise would be expected.

It is Aerie’s intention to reinvest the earnings of Aerie Limited and Aerie Ireland Limited in those operations. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. Aerie Limited and Aerie Ireland Limited have incurred losses and experienced negative operating cash flows since inception, and as such, Aerie has not recognized a deferred tax liability related to its investment in either subsidiary as of December 31, 2015.

As of December 31, 2015, the Company had federal and state net operating loss carry-forwards of approximately $61.1 million, which expire from 2024 through 2034. Included in the net operating loss carry-forwards are approximately $4.0 million of net operating loss carry-forwards related to exercises of stock-based awards, the tax benefit from which, if realized, will be credited to additional paid-in capital. Net operating loss and tax credit carry-forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities and 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, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.

Certain transactions occurred in 2015 and prior years that resulted in ownership changes which will limit the future use of certain federal and state net operating loss and credit carry-forwards. Those federal and state net operating losses and credits that are not limited are included as deferred tax assets and have been fully offset by a valuation allowance as of December 31, 2015, as the Company believes, based on our history of operating losses, it is more likely than not that the tax benefits will not be realized.