Note 12. Income Taxes

As of December 31, 2017, the Company had U.S. net operating loss (“NOL”) carryforwards of $61 million, which will expire beginning in 2033. The NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. This could limit the amount of NOLs that the Company can utilize annually to offset future taxable income or tax liabilities.

The components of the Company’s deferred tax assets are as follows:


	December 31, 2017		December 31, 2016
Deferred tax assets:
Net federal operating loss carryforward	$	12,844,032	$	12,747,837
Net foreign operating loss carryforward		49,846		23,293
Net state operating loss carryforward		7,981,812		4,068,086
Non-cash compensation		1,719,315		1,450,620
Research and development credits		5,713,709		3,491,251
Deferred finance costs		44,042		—
Fixed Assets		2,597		—
Accrued expenses		472,004		308,007
Deferred tax asset, excluding valuation allowance		28,827,357		22,089,094
Fixed Assets		—		(19,985)
Less valuation allowance		(28,827,357)		(22,069,109)
Net deferred tax assets	$	—	$	—

The Company records a valuation allowance to reduce the deferred tax assets reported if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against its deferred tax assets at December 31, 2017 and 2016 because the Company’s management has determined that it is more likely than not that these assets will not be realized. The valuation allowance for deferred tax assets was $7,756,147 as of December 31, 2015.

A reconciliation of income tax expense (benefit) at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements is as follows:


	December 31, 2017		December 31, 2016
U.S. federal statutory income tax rate	34.0	%	34.0	%
State taxes, net of federal benefit	10.0		9.4
Permanent differences	(2.9)		(3.7)
Tax credit	7.7		12.8
US Federal tax rate change - tax reform	(25.4)		—
Change in valuation allowance	(23.4)		(52.5)
Other	—		—
Effective tax rate	—	%	—	%

The Company is not currently under examination at the federal or state levels and as of the date of the consolidated financial statements there were no known assessments.

Impact of U.S. Tax Reform

On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Act”) into law. Effective January 1, 2018, among other changes, the Act (1) reduces the Company’s U.S. federal corporate tax rate from 34 percent to 21 percent, (2) changes the rules relating to net operating loss ("NOL") carryforwards and carrybacks, (3) eliminates the corporate alternative minimum tax ("AMT") and changes how existing AMT credits can be realized; and (4) requires companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. The impact on the Company's financial statements for the period ended December 31, 2017 is immaterial, primarily because the Company has a valuation allowance on deferred tax assets in the U.S. In addition, the Act makes the AMT credit refundable in tax years beginning after 2017.

The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Tax Act did not have a material impact on our financial statements since our deferred temporary differences in the United States are fully offset by a valuation allowance and we do not have any significant off shore earnings from which to record the mandatory transition tax.