Note 8 – Income Taxes

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

	Year ended December 31,
	2016			2015			2014

Federal statutory rate		34.00	%		34.00	%		34.00	%
State taxes		1.16	%		2.89	%		0.81	%
Permanent differences		-10.62	%		-5.84	%		-6.58	%
Research and development		15.99	%		14.31	%		3.81	%
State taxes/ sale of NOL		4.54	%		3.79	%		6.25	%
Valuation allowance		-40.53	%		-45.77	%		-32.04	%
Other		0.00	%		0.41	%		0.00	%
Effective tax rate		4.54	%		3.79	%		6.25	%

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets were as follows:

	As of December 31,
	2016			2015
Federal net operating losses	$	23,644,647		$	14,763,641
State net operating losses		1,554,730			1,144,762
Stock options		1,419,494			669,012
Federal tax credit		12,709,438			4,832,146
State tax credits		353,684			159,258
Amortization		69,529			76,222
Accrued expense		2,731			13,735
Other		18,042			15,431
Total gross deferred tax assets		39,772,295			21,674,207
Less valuation allowance		(39,772,295	)		(21,674,207	)
Net deferred tax assets	$	-		$	-

In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. There was a full valuation allowance against the net deferred tax assets as of December 31, 2016 and December 31, 2015.

At December 31, 2016, the Company had federal net operating loss (“NOL”) carryforwards of approximately $69.5 million which expire between 2029 and 2036. At December 31, 2016, the Company had federal research and development credits carryforwards of approximately $1.3 million and an orphan drug credit carryover of approximately $11.4 million. The Company may be subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code. The effect of an ownership change would be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. Although we have not completed an analysis under Section 382 of the Code, it is likely that the utilization of the NOLs will be limited.

At December 31, 2016, the Company had approximately $26.2 million of State of New Jersey NOL’s which expire between 2030 and 2035. At December 31, 2016, the Company had approximately $0.6 million of the State of New Jersey research development credits carryforwards. The State of New Jersey has enacted legislation permitting certain corporations located in New Jersey to sell state tax loss carryforwards and state research and development credits, or net loss carryforwards. In 2016, the Company sold $19,196,765 of State of New Jersey NOL’s and $257,222 of State of New Jersey R&D Credits for $1,845,986.

Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2016, there were no uncertain positions. The Company’s U.S. federal and state net operating losses have occurred since its inception in 2009 and as such, tax years subject to potential tax examination could apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing authorities. The IRS is currently auditing the 2015 tax year. Even though the audit is in the beginning phase, the Company does not expect any material audit adjustments. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. The Company did not have any unrecognized tax benefits and has not accrued any interest or penalties through 2016.