13. Income Taxes

The summary of the income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016 is as follows, in thousands of dollars:


	Years Ended December 31,
	2018		2017		2016
Current
Federal	$	26,772	$	18,288	$	544
State		5,621		3,822		78
Deferred
Federal		(2,450)		21,493		(39,898)
State		(760)		(269)		(1,576)
Total	$	29,183	$	43,334	$	(40,852)

A reconciliation of income tax expense at the U.S. Federal statutory income tax rate to provision for income taxes at the Company’s effective tax rate is as follows, in thousands of dollars:


	Years Ended December 31,
	2018		2017		2016
Income tax expense computed at U.S. Federal statutory income tax rate (1)	$	29,437	$	35,217	$	17,629
State income taxes		3,674		2,714		(1,523)
Permanent items (3)		(2,196)		(2,311)		715
Research and development credits		(3,199)		(2,196)		(1,902)
Uncertain income tax position		716		(1,137)		143
Effect of rate changes (2)		—		9,694		—
Change in valuation allowance (4)		—		—		(56,019)
Other		751		1,353		105
Income tax expense (benefit)	$	29,183	$	43,334	$	(40,852)

(1)Includes the effect of the Tax Cuts and Jobs Act, which lowered the U.S. corporate income tax rate from 35 percent to 21 percent effective January 1, 2018.

(2)Relates to the remeasurement of existing deferred taxes as a result of the change to the U.S. corporate income tax rate. The impact was a reduction in value of deferred taxes.

(3)Primarily relates to tax benefit from the exercise of employee stock options.

(4)Reduction in the 2016 valuation allowances was attributable to profitable results of operations.

The significant components of the Company’s deferred income tax assets (liabilities) were as follow, in thousands of dollars:


	As of December 31,
	2018		2017
Deferred tax assets:
Convertible bond hedge	$	21,412	$	—
Accrued sales deductions		13,205		8,449
Accrued compensation and stock based compensation		8,218		7,090
Non-recourse liability related to sale of future royalties		5,571		6,377
Research and development credit carryforwards		3,817		3,795
Amortization		3,289		2,073
Net operating loss carryforwards		2,900		5,072
Deferred rent		125		211
Inventory		499		480
Alternative Minimum Tax (AMT) credit		978		1,613
Other		1,143		645
Total deferred tax assets		61,157		35,805
Less: valuation allowance		(9)		—
Deferred tax asset, net of valuation allowance		61,148		35,805

Deferred tax liability:
Debt discount on 2023 Notes		(17,568)		—
Infringement legal costs		(10,697)		(10,557)
Depreciation		(236)		(264)
Section 481(a)		(2,964)		(4,141)
Net deferred tax assets	$	29,683	$	20,843

In assessing the realizability of deferred income tax assets, management considers whether it is more-likely-than-not that some or all of the deferred income tax assets will not be realized. The ultimate realization of the deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the net operating loss (NOL) and tax credit carryforwards are available. Management considers projected future taxable income, the scheduled reversal of deferred income tax liabilities, and available tax planning strategies that can be implemented by the Company in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the NOL and credit carryforwards are available to reduce income taxes payable, management had determined it is more-likely-than-not to realize such net deferred tax assets.

The Company has NOL and other tax credit carryforwards in several jurisdictions. The use of the Company’s U.S. Federal and State NOL carryforwards and research and development credits are restricted in annual use due to changes in the Company’s ownership. The Company’s state NOLs have a similar limitations on the use of NOLs. In addition, states may also impose other future limitations through state legislation or similar measures. Despite the NOL carryforwards, the Company may incur higher state income tax expense in the future.

As of December 31, 2018, the U.S. Federal and state NOL carryforwards amounted to approximately $20.6 million and $9.2 million, respectively, and will expire in various years beginning in 2033. For the year ended December 31, 2018, the Company utilized NOLs of approximately $18.4 million and expects the remaining $20.6 million of Federal NOL carryforwards to become available in the future years.

As of December 31, 2018, the Company has available research and development credit carryforwards of approximately $4.2 million, which will become available in 2020 and will expire, if unused, starting in 2026.

Due to NOL and research and development credit carryforwards, all U.S. Federal and state income tax returns filed by the Company are subject to examination by the taxing jurisdictions.

The Company accounts for uncertain income tax positions pursuant to the guidance in FASB ASC Topic 740, Income Taxes. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. Some uncertain income tax position liabilities have been recorded against the Company’s deferred income tax assets to offset such tax attribute carryforwards and other positions that can’t be offset by tax attributes until a liability has been booked.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows, in thousands of dollars:


	Years Ended December 31,
	2018		2017		2016
Balance as of January 1	$	8,859	$	9,299	$	9,341
Gross increases related to current year tax positions		1,108		1,178		662
Gross decreases related to current year tax positions		—		—		(169)
Gross increases related to prior year tax positions		—		947		—
Gross decreases related to prior year tax positions		(484)		—		(375)
Lapse of statute of limitations		(635)		—		—
Change in tax rates		—		(2,565)		(160)
Balance as of December 31	$	8,848	$	8,859	$	9,299

As of December 31, 2018, 2017 and 2016, the Company recorded $0.6 million of tax benefit, zero and $0.5 million of current tax expense on setting up an uncertain tax position related to the AMT. The $0.6 million current tax benefit was caused by the expiration of statute of limitation on 2014 AMT. The Company also recorded a $0.3 million expense on setting up an uncertain tax position related to 2018 research and development tax credit. The Company does not anticipate a significant increase or decrease in the uncertain income tax benefits within the next 12 months.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Act), resulting in significant modifications to existing law. The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation on qualified property and expanded limitations on the deductibility of executive compensation. As of December 31, 2018, the Company has completed the accounting for all of the enactment date income tax effects of the Tax Act and determined that no adjustments are need to be recognized to the provisional amounts recorded at December 31, 2017.