Income Taxes

For the year ended December 31, 2017, 2016, and 2015 no income tax expense was recorded due to the Company’s net operating losses (NOLs) and full valuation allowance.

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows (in thousands):



	Year Ended December 31,
	2017			2016			2015
Income tax benefit using U.S. federal statutory rate	$	(86,426	)	$	(62,141	)	$	(34,391	)
State income taxes, net of federal benefit	(22,148		)	(5,236		)	(4,434		)
Stock-based compensation	(5,909		)	1,585			752
Research and development tax credits	(2,468		)	(2,794		)	(1,469		)
Effect of federal tax law change	82,767			—			—
Other adjustments - ASU 2016-09 adoption	6,135			—			—
Change in the valuation allowance	(19,198		)	48,096			39,291
Convertible note	47,016			—			—
Permanent items	543			53			26
Other	(312		)	1,371			225
Expiring NOLs and credits - 382 Limitation	—			19,066			—
Income tax expense	$	—		$	—		$	—

The Company is subject to Massachusetts net worth taxes, not based on income, which is largely offset by allowable tax credits and recorded as a component of operating expenses.

The principal components of the Company's deferred tax assets are as follows (in thousands):



	December 31,
	2017			2016
Deferred tax assets:
NOL carryforwards	$	207,620		$	193,436
Capitalized research and development	1,411			1,970
Research and development credits	5,313			4,525
Depreciation	37			—
Accrued expenses	3,846			3,109
Stock-based compensation	15,040			14,903
UNICAP	234			—
Allowance for bad debt	346			—
Other	91			55
Gross non-current deferred tax assets	233,938			217,825
Valuation allowance	(233,938		)	(217,825		)
Net non-current deferred tax assets	$	—		$	—
Deferred tax liabilities:
Depreciation	$	—		$	(173	)
Convertible debt	(35,311		)	—
Gross non-current deferred tax liabilities	(35,311		)	(173		)
Valuation allowance	35,311			173
Net non-current deferred tax liabilities	$	—		$	—

FASB ASC 740—Income Taxes requires that a valuation allowance be established to reduce a deferred tax asset to its realizable value when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including the utilization of past tax credits and length of carry-back and carry-forward periods, reversal of temporary differences, tax planning strategies, our current and past performance, the market environment in which we operate, and the evaluation of tax planning strategies to generate future taxable income.

The Company has recorded a valuation allowance against its deferred tax assets in each of the years ended December 31, 2017, 2016, and 2015, because the Company's management believes that it is more likely than not that these assets will not be realized. The increase in the valuation allowance in 2017 primarily relates to the net loss incurred by the Company.

As of December 31, 2017, the Company had federal and state net operating loss ("NOL") carryforwards of approximately $751.7 million and $669.3 million, respectively, which may be used to offset future taxable income.

As of December 31, 2017, the Company also had federal and state tax credits of $4.4 million and $1.2 million, respectively, to offset future tax liabilities. The federal general business and state research and development tax credits will expire at various dates through 2037. During 2017, a formal study was conducted to document the qualified research activities of the Company for the years ended December 31, 2014 through December 31, 2016. The study resulted in $0.2 million of additional tax credit carryforward which has been fully offset by a valuation allowance.

The Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. Upon adoption of this standard on January 1, 2017, the Company has recognized their previously unrecognized excess tax benefits, which resulted in a cumulative-effect increase of $6.1 million to their deferred tax assets along with an increase to the corresponding valuation allowance against these deferred tax assets. At December 31, 2016, $16.1 million of the federal and state NOL carryforwards relate to excess stock-based compensation tax benefits.

The Company applies the accounting guidance in ASC 740 related to accounting for uncertainty in income taxes. The Company’s reserves related to taxes are based on a determination of whether, and how much of, a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. As of December 31, 2017, the unrecognized tax benefit was $1.3 million which, if recognized, will not affect the annual effective tax rate as these unrecognized tax benefits would increase deferred tax assets which would be subject to a full valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in thousands):



	Uncertain Tax Position
Balance at December 31, 2016	$	(78	)
Decreases related to prior year tax positions	(2,042		)
Increases related to prior year tax positions	2,120
Decreases related to current year tax positions	—
Increases related to current year tax positions	1,263
Ending uncertain tax benefits	$	1,263

In 2016, we completed an evaluation of our tax attributes through December 31, 2015 as outlined under Section 382 of the Internal Revenue Code, which resulted in a reduction of our NOL and credit carryforwards. We have adjusted our NOL and credit carryforwards, and the related valuation allowance, according to the results of this evaluation.

The Company and its subsidiaries file income tax returns in the United States, as well as various state and foreign jurisdictions. Generally, the tax years 2014 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, or state or foreign tax authorities, to the extent utilized in a future period.

No interest or penalties have been recorded for the years ended December 31, 2017, 2016, or 2015. The Company does not expect any significant change in its uncertain tax positions in the next 12 months.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation of the deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018. Among other changes, the Act reduces to the federal tax rate down to 21%. In regard to the change in the federal tax rate as it relates to the Company’s deferred tax assets and liabilities, we have decreased our related deferred tax assets by $82.8 million along with the corresponding valuation allowance against these deferred tax assets.