Income Taxes

12 Months Ended

Dec. 31, 2019

The significant components of income tax are as follows (dollars in thousands):



	Years Ended December 31,
	2019			2018			2017
Current
Federal	$	29,333		$	26,772		$	18,288
State	10,930			5,621			3,822
Deferred
Federal	(4,551		)	(2,450		)	21,493
State	(1,281		)	(760		)	(269		)
Total income tax expense	$	34,431		$	29,183		$	43,334

A reconciliation of income tax expense at the U.S. federal statutory income tax rate to annual income tax expense at the Company's effective tax rate is as follows (dollars in thousands):



	Years Ended December 31,
	2019			2018			2017
Income tax expense computed at U.S. federal statutory income tax rate	$	30,972		$	29,437		$	35,217
State income taxes	7,543			3,674			2,714
Permanent items	1,332			(2,196		)	(2,311		)
Research and development credits	(2,071		)	(3,199		)	(2,196		)
Uncertain income tax position	(2,992		)	716			(1,137		)
Effect of U.S. tax law change⁽¹⁾	—			—			9,694
Other	(353		)	751			1,353
Income tax expense	$	34,431		$	29,183		$	43,334

⁽¹⁾Due to the 2017 Tax Cuts and Job Act, which lowered the U.S. Corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, existing deferred taxes were remeasured.

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



	As of December 31,
	2019			2018
Deferred tax assets:
Convertible bond hedge	$	17,197		$	21,412
Accrued product returns and rebates	15,123			13,205
Accrued compensation and stock based compensation	10,349			8,218
Non-recourse liability related to sale of future royalties	5,320			5,571
Research and development credit carryforwards	3,817			3,817
Amortization of intangibles	4,617			3,289
Net operating loss carryforwards	2,245			2,900
Operating lease liability	8,187			—
Inventory	1,385			499
Alternative Minimum Tax (AMT) credit	926			978
Other	199			1,268
Total deferred tax assets	69,365			61,157
Less: valuation allowance	(11		)	(9		)
Total deferred tax asset, net of valuation allowance	69,354			61,148
Deferred tax liability:
Debt discount on 2023 Notes	(14,109		)	(17,568		)
Patent infringement legal costs	(10,613		)	(10,697		)
Operating lease assets	(5,237		)	—
Depreciation	(2,778		)	(236		)
IRC Section 481(a) liability	(2,126		)	(2,964		)
Unrealized gain on marketable securities	(2,428		)	—
Total deferred tax liabilities	(37,291		)	(31,465		)
Net deferred tax assets	$	32,063		$	29,683

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. Due to changes in the Company's ownership, the utilization of net operating loss carryforwards and research and development credit carryforwards, that can be used to offset future taxable income, are subject to annual limits in accordance with Internal Revenue Code (IRC) provisions, as well as similar state provisions. 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, 2019, the U.S. federal and state NOL carryforwards amounted to $10.8 million and $9.9 million, respectively, and will expire in various years beginning in 2033. For the year ended December 31, 2019, the Company utilized NOLs of $10.2 million and expects the remaining federal and state NOL carryforwards to become available in the future years.

As of December 31, 2019, the Company has available research and development credit carryforwards of $4.2 million, which will become available in 2020 and will expire, if unused, starting in 2026.

The Company is no longer subject to U.S. Federal income tax examinations for years prior to 2016, with the exception that operating loss or tax credit carryforwards generated prior to 2016 may be subject to tax audit adjustment.

The Company accounts for uncertain income tax positions pursuant to the guidance in 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 cannot 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 (dollars in thousands):



	Years Ended December 31,
	2019			2018			2017
Balance as of January 1	$	8,848		$	8,859		$	9,299
Gross increases related to current year tax positions	208			1,108			1,178
Gross increases related to prior year tax positions	—			—			947
Gross decreases related to prior year tax positions	(49		)	(484		)	—
Lapse of statute of limitations	(3,029		)	(635		)	—
Change in tax rates	—			—			(2,565		)
Balance as of December 31	$	5,978		$	8,848		$	8,859

The Company recorded $3.0 million and $0.6 million of tax benefit in 2019 and 2018, respectively, as a result of the expiration of statutes of limitation. The Company also recorded $0.2 million and $0.3 million for uncertain tax positions related to research and development tax credits in 2019 and 2018, respectively. The Company does not anticipate a material impact to the financial statements in the next 12 months as a result of uncertain tax positions and expiring statutes of limitation.