13. Income Taxes

The components of loss before income tax benefit were as follows (in thousands):

	Year Ended December 31,
	2016			2015			2014
Domestic		(56,237	)		(38,702	)		(17,014	)
Foreign		(13,447	)		(606	)		—
Total	$	(69,684	)	$	(39,308	)	$	(17,014	)

The income tax provision (benefit) consists of the following (in thousands):

	Year Ended December 31,
	2016			2015			2014
Current income tax provision:
Federal	$	28,759		$	—		$	—
State		—			—			—
Foreign		—			—			—
Total	$	28,759		$	—		$	—
Deferred income tax provision (benefit):
Federal		(6,319	)		—			—
State		—			—			—
Foreign		(976	)		(99	)		—
Total		(7,295	)		(99	)		—
Total income tax provision (benefit)	$	21,464		$	(99	)	$	—

A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:

	Year Ended December 31,
	2016			2015			2014
U.S. federal taxes at statutory rate		(35.0	%)		(34.0	%)		(34.0	%)
State taxes, net of federal benefits		—			—			—
U.S. tax credits		(43.8	)		(3.4	)		(1.0	)
Warrants		—			23.0			2.1
Add back of Orphan Drug Credit		7.4			—			—
Incentive stock option compensation		3.8			1.8			0.8
Other		(0.6	)		—			0.2
Foreign income tax rate differential		2.4			0.4			—
Change in valuation allowance		96.6			11.9			31.9
Total		30.8	%		(0.3	%)		—	%

The increase in the effective tax rate from (0.3%) during 2015 to 30.8% during 2016 was primarily related to the acceleration of deferred revenue for U.S income tax purposes partially offset with utilization of operating losses and credits.

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets and liabilities are as follows (in thousands):

	Year Ended December 31,
	2016			2015
Deferred tax assets:
Net operating loss carryforwards	$	13,795		$	18,668
Tax credits		12,625			2,223
Stock-based compensation		4,510			2,177
Deferred revenue		61,704			—
Accruals and reserves		3,902			1,318
Gross deferred tax assets		96,536			24,386
Valuation allowance		(84,528	)		(24,072	)
Total deferred tax assets		12,008			314
Deferred tax liabilities:
Tangible assets		(4,543	)		(314	)
Intangible assets		(7,015	)		(7,350	)
Total deferred tax liabilities		(11,558	)		(7,664	)
Net deferred tax liabilities	$	450		$	(7,350	)

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover a majority of its recorded net deferred taxes in future periods. The Company recognized a $6.3 million deferred tax benefit as a partial reduction to the valuation allowance from the prospective carryback of existing temporary differences. The Company recorded a valuation allowance against the remaining net deferred tax assets at December 31, 2016 and the net deferred tax asset at December 31, 2015. The net valuation allowance increased by $60.5 million and $4.9 million in 2016 and 2015, respectively.

At December 31, 2016, the Company has generated net operating loss, or NOL, carryforwards (before tax effects) for federal, state and foreign income tax purposes of $30.5 million, $3.6 million and $13.3 million, respectively. None of these amounts represent tax deductions from stock-based compensation, which will be recorded as an adjustment to additional paid-in capital when they reduce tax payable. These federal, state and foreign NOL carryforwards will begin to expire in 2027, 2033 and 2023, respectively, if not utilized. In addition, the Company has federal and state tax credit carryforwards of $11.6 million and $2.9 million, respectively, to offset future income tax liabilities. The federal tax credits can be carried forward for 20 years and will start to expire in 2034, if not utilized, while the state research and development tax credit can be carried forward indefinitely.

Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, the Company’s ability to utilize NOL carryforwards or other tax attributes, such as federal tax credits, in any taxable year may be limited if the Company has experienced an “ownership change.” Generally, a Section 382 ownership change occurs if one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Similar rules may apply under state tax laws. We have experienced an ownership change that we believe under Section 382 of the Code will result in limitations in our ability to utilize net operating losses and credits. In addition, the Company may experience future ownership changes as a result of future offerings or other changes in ownership of its stock. As a result, the amount of the NOLs and tax credit carryforwards presented in the financial statements could be limited and may expire unutilized.

Uncertain Tax Positions

A reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2016 and 2015 is as follows (in thousands):

	Year Ended December 31,
	2016			2015
Balance at beginning of year	$	1,204		$	508
Additions based on tax positions related to prior year		614			11
Reductions based on tax positions related to prior year		(81	)		—
Additions based on tax positions related to current year		771			685
Balance at end of year	$	2,508		$	1,204

Without regard to the valuation allowance, $1.1 million of unrecognized tax benefits included in the consolidated balance sheet would, if recognized, affect the effective tax rate.

The Company does not foresee material changes to its gross uncertain income tax position liability within the next 12 months.

The Company files income tax returns in the United States and the Netherlands. The federal and state income tax returns are open under the statute of limitations subject to tax examinations for the tax years ended December 31, 2010 through December 31, 2015. 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 IRS or state tax authorities to the extent utilized in a future period. For the Netherlands, the tax administration can impose an additional assessment within five years from the year in which the tax debt originated.

The Company will recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense in its consolidated statements of operations. At December 31, 2016, the Company has recorded no interest and penalties.