Note 14. Income Taxes

The Company recorded an income tax benefit of $0.7 million for the year ended December 31, 2019 primarily due to research and development tax credits and the recognition of deferred tax assets in Protagonist Australia. The Company believes these deferred tax assets will be realized in the future due to expected profitability for this subsidiary.

The Company recorded an income tax benefit of $0.8 million for the year ended December 31, 2018 from the recognition of deferred tax assets in Protagonist Australia. No provision for income taxes was recorded for the year ended December 31, 2017. The Company had incurred net operating losses and did not reflect any benefit of operating loss carryforwards in the consolidated financial statements for the year ended December 31, 2017. The Company continues to maintain a valuation allowance against its U.S. deferred tax assets due to the uncertainty surrounding the realization of such assets.

The following table presents domestic and foreign components of net loss before income taxes (in thousands):


	Year Ended December 31,
	2019		2018		2017
Domestic	$	(72,271)	$	(37,511)	$	(34,556)
Foreign		(5,607)		(2,212)		(2,401)
Total net loss before taxes	$	(77,878)	$	(39,723)	$	(36,957)

The federal, state and foreign components of the income tax expense (benefit) are summarized as follows:


		Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	—	$	—	$	—
State		—		—		—
Foreign		84		—		—
Total current tax expense		84		—		—
Deferred:
Federal		—		—		—
State		—		—		—
Foreign		(775)		(799)		—
Total deferred tax benefit		(775)		(799)		—
Income tax benefit	$	(691)	$	(799)	$	—

The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows:


	Year Ended December 31,
	2019		2018		2017
Federal statutory income tax rate	21.0	%	21.0	%	34.0	%
State taxes, net of federal benefit	1.2		7.0		0.5
Research and development credits	4.3		(1.3)		2.6
Foreign tax rate difference	0.7		0.4		(1.2)
Change in valuation allowance	(23.8)		(22.2)		(5.2)
Change in tax law	—		—		(31.2)
Other	(2.5)		(2.9)		0.5
Provision for income taxes	0.9	%	2.0	%	—	%

The components of the deferred tax assets are as follows (in thousands):


	December 31,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	39,907	$	27,704
Depreciation and amortization		318		269
Accruals/other		5,454		2,455
Operating lease liability		1,516		—
Research and development credits		8,038		4,270
Total deferred tax assets		55,233		34,698
Deferred tax liabilities:
Operating right-of-use asset		(1,269)		—
Total deferred tax liabilities		(1,269)		—
Valuation allowance		(52,531)		(34,040)
Net deferred tax assets	$	1,433	$	658

Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has established a valuation allowance to offset U.S. deferred tax assets as of December 31, 2019 and 2018 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The valuation allowance increased by approximately $18.5 million, $8.2 million and $1.9 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. As a result of such ownership changes, the Company’s ability to realize the potential future benefit of tax losses and tax credits that existed at the time of the ownership change may be significantly reduced. Based on a review of the Company’s equity transactions since inception, the Company believes a portion of its net operating loss carryforwards and credit carryforwards may be limited due to certain of its equity financing transactions.

At December 31, 2019, the Company had $164.1 million of federal net operating loss carryforwards and $151.1 million of state net operating loss carryforwards. $78.7 million of the federal net operating loss carryforwards will begin to expire in 2033, if not utilized, and the remaining $85.4 million have no expiration. The state net operating loss carryforwards will begin to expire in 2035, if not utilized.

At December 31, 2019, the Company also had accumulated Australian tax losses of AUD 13.1 million ($9.2 million) available for carry forward against future earnings which, under relevant tax laws, do not expire but may be limited under certain circumstances.

As of December 31, 2019, the Company had $6.6 million of federal and $3.3 million of state research and development tax credit carryforwards available to reduce future income taxes. The federal research and development tax credits will begin to expire in 2035, if not utilized. The state research and development tax credits have no expiration date.

As of December 31, 2019, the Company had AUD 3.5 million ($2.5 million) of Australian research and development tax credit carryforwards available to reduce future income taxes. The Australian research and development tax credits have no expiration date.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	Year Ended December 31,
	2019		2018		2017
Balance at beginning of year	$	9,466	$	5,414	$	2,131
Increase based on tax positions related to prior years		184		108		—
Increase based on tax positions related to current year		6,981		3,944		3,283
Balance at end of year	$	16,631	$	9,466	$	5,414

At December 31, 2019, the Company had unrecognized tax benefits of $16.6 million, of which $4.1 million would affect the effective tax rate if recognized and $12.5 million is subject to a valuation allowance and would not affect the effective tax rate if recognized. The Company does not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes, as necessary. Management determined that no accrual for interest or penalties was required as of December 31, 2019, 2018 and 2017.

The Company files income tax returns in the United States federal jurisdiction, the State of California and Australia. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. The Company’s tax returns remain open for examination for all years.