For the years ended December 31, 2020 and 2019, the Company did not recognize any current or deferred income tax expense or benefit due to the current and historical losses incurred by the Company. Losses before income taxes were $21.8 million and $20.2 million for the years ended December 31, 2020 and 2019, respectively, substantially all of which were incurred in the United States.

On March 27, 2020, the United States enacted the CARES Act. The Cares Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company considered the tax related provisions under the CARES Act and noted that the effect of such provisions was not expected to have a material impact on the Company’s results of operations, cash flows, and consolidated financial statements.


	As of December 31,
	2020		2019
Expected provision at statutory rate	21.0	%	21.0	%
State tax - net of federal benefit	7.5	%	5.3	%
Tax credits	2.8	%	3.2	%
Permanent differences	(1.0)	%	(8.1)	%
Other	1.1	%	2.9	%
Change in valuation allowance	(31.4)	%	(24.3)	%
Total provision for income taxes	—	%	—	%

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019 are comprised of the following:


	As of December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	35,714,104	$	31,575,288
Capital loss carryforwards	7,298,024		7,298,052
Start-up costs	11,234,623		11,234,751
Accruals and reserves	397,982		166,611
Intellectual property amortization	2,285,247		555,352
Stock-based compensation expense	1,290,212		1,123,100
Tax credits	2,541,244		1,926,677
Lease liability	125,266		96,895
Total deferred tax assets	60,886,702		53,976,726
Valuation allowance	(60,761,412)		(53,877,168)
Deferred tax assets, net of allowance	$	125,290	$	99,558

Deferred tax liabilities:
Lease right-of-use assets	(125,290)		(99,558)
Net deferred tax assets	$	—	$	—

The Company has evaluated the positive and negative evidence bearing upon its ability to realize its deferred tax assets. Management has considered the Company’s history of cumulative net losses, estimated future taxable income, and prudent and feasible tax planning strategies and has concluded that it is more likely than that the Company will not realize the benefits of its deferred tax assets. Accordingly, a full valuation allowance has been established against these net deferred tax assets as of December 31, 2020 and 2019, respectively. The Company’s valuation allowance increased during 2020 by approximately $6.9 million primarily due to the generation of net operating losses and research and development and orphan drug credit carryforwards.

As of December 31, 2020 and 2019, the Company had U.S. federal net operating loss ("NOL") carryforwards of $128.0 million and $113.6 million, respectively, which may be available to offset future income tax liabilities. The Tax Cut and Jobs Act, which was enacted in December 2017 (the "TCJA"), will generally allow federal losses generated after 2017 to be carried over indefinitely, but will generally limit the NOL deduction to the lesser of the NOL carryover or 80% of a corporation’s taxable income (subject to Section 382 of the Internal Revenue Code of 1986, as amended ("IRC")). In addition, there will be no carryback for losses generated after 2017. Losses generated prior to 2018 will generally be deductible to the extent of the lesser of a corporation’s NOL carryover or 100% of a corporation’s taxable income and will be available for twenty years from the period the loss was generated. The Company has federal NOLs generated after 2017 of $75.4 million, which do not expire. The federal NOLs generated prior to 2018 of $52.6 million will expire at various dates through 2037.

As of December 31, 2020 and 2019, the Company also had U.S. state NOL carryforwards of $126.7 million and $112.4 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2040.

As of December 31, 2020 and 2019, the Company had federal tax credit carryforwards of approximately $2.2 million and $1.6 million, respectively, which are available to offset future federal tax liabilities which expire at various dates through 2040. As of December 31, 2020 and 2019, the Company had state tax credit carryforwards of approximately $0.5 million and $0.4 million, respectively, which are available to reduce future tax liabilities which expire at various dates through 2035.

Under the provisions of the IRC, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Utilization of U.S. federal and state NOL and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 and Section 383 of the IRC, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax

The Company has not yet conducted a comprehensive study to assess whether a change of ownership has occurred, or whether there have been multiple ownership changes since its formation. Any limitation may result in expiration of a portion of the NOL carryforward or tax credit carryforwards before utilization, which would be offset by a change in the Company's valuation allowance. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company has not yet conducted a study of tax credit carryforwards. Such a study, once undertaken by the Company, may result in an adjustment to our tax 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 tax credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheets or consolidated statements of operations and comprehensive loss if an adjustment is required.


	Year ended December 31,
	2020		2019
Gross unrecognized tax benefits at beginning of year	$	303,050	$	—
Additions for tax positions taken in a prior year	—		303,050
Additions for tax positions taken in the current year	—		—
Reductions for tax positions taken in the prior year due to settlement	—		—
Reductions for tax positions taken in the prior year due to statutes lapsing	—		—
Gross unrecognized tax benefits at end of year	$	303,050	$	303,050

The uncertain tax positions giving rise to the unrecognized tax benefits of $0.3 million at December 31, 2020 relate to the timing of certain income and deductions for federal income tax purposes taken by Histogenics prior to the Merger. The reversal of unrecognized tax benefits would not have any impact on the effective tax rate in the future and is not expected to create cash liability.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In a normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company’s tax years are still open under status from 2017 to present.