13.

Income taxes

The components of loss from continuing operations before income taxes are as follows for the years ended

December

31:

(in thousands)	2018			2017			2016
Domestic (United Kingdom)	$	12,623		$	18,171		$	(730	)
Foreign (United States)		(37,404	)		(49,763	)		(24,622	)
Loss from continuing operations before income taxes	$	(24,781	)	$	(31,592	)	$	(25,352	)

The components for the income tax (expense) benefit from continuing operations are as follows for the years ended

December

31:

(in thousands)	2018			2017			2016
Current:
Federal	$	—		$	—		$	—
U.K.		(532	)		—			—
Japan		(45	)		(14	)		(85	)
China		(13	)		(39	)		(12	)
State		—			(46	)		(51	)
Total current provision		(590	)		(99	)		(148	)
Deferred:
Federal		30,665			—			752
U.K.		(1,343	)		(1,535	)		2,630
State		8,554			—			540
Total deferred benefit (expense)		37,876			(1,535	)		3,922
Income tax benefit (expense)	$	37,286		$	(1,634	)	$	3,774

Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations and other comprehensive income. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, we must allocate the tax provision to the other categories of earnings. As a result, the Company has recorded a tax expense of approximately

$39.4

million in discontinued operations related to the sale of the Company’s U.S. Laboratory Services Business to Quest. A corresponding tax benefit has been recorded as part of continuing operations, representing the valuation allowance released on the beginning of the year net operating losses.

The Company’s effective income tax rate differs from the statutory domestic (United Kingdom) income tax rate as follows for the years ended

December 31:

	2018			2017			2016
Income tax rate		19.0	%		19.3	%		20.0	%
U.K. research and development credit		1.8			1.5			1.9
Effect of U.S. tax reform – Federal tax rate change		—			(69.2	)		—
Permanent items		1.0			5.9			(1.9	)
Prior period adjustments		(5.2	)		—			—
State taxes		9.2			9.6			4.9
Other		2.0			4.6			(1.5	)
Effect of foreign tax rate differential		2.9			28.0			13.1
Uncertain tax positions		(1.7	)		—			—
Valuation allowance		121.5			(5.0	)		(21.6	)
Effective income tax rate		150.5	%		(5.3	)%		14.9	%

The Company is headquartered in the United Kingdom and the statutory U.K. corporate tax rate for the years ended

December 31, 2018,

2017

and

2016

was

19.0%,

19.3%

and

20.0%,

respectively. The U.S. federal corporate tax rate for the years ended

December 31, 2018,

2017

and

2016

was

21%,

34%

and

34%,

respectively. The Company is subject to taxation in the U.S. and various state, local and foreign jurisdictions. The Company remains subject to examination by various tax authorities for tax years

2015

through

2018.

With a few exceptions, the Company is

longer subject to examinations by tax authorities for the tax years

2014

and prior. However, net operating losses from the tax years

2014

and prior would be subject to examination if and when used in a future tax return to offset taxable income. The Company’s policy is to recognize income tax related penalties and interest, if any, in its provision for income taxes and, to the extent applicable, in the corresponding income tax assets and liabilities, including any amounts for uncertain tax positions.

The United Kingdom’s Summer Finance Bill, which was enacted on

September 15, 2016,

contained reductions in corporation tax to

19%

from

April 1, 2017

and

17%

from

April 1, 2020.

The Company has measured its U.K. deferred taxes at the statutory tax rate of

17%,

reflecting the anticipated timing of the reversal of its deferred tax balances.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows for the years ended

December

31:

(in thousands)	2018			2017

Deferred tax assets:
U.S. federal net operating losses	$	11,478		$	33,713
State net operating loss (net of federal)		2,865			8,450
U.S. federal research and development credit		849			587
U.K. net operating loss		496			1,894
Share options		1,724			2,611
Accrued liabilities		1,052			393
Intangible assets		—			2,392
State credits		512			377
Other		136			167
Total deferred tax assets		19,112			50,584
Valuation allowance		(17,991	)		(48,098	)
Total deferred tax assets	$	1,121		$	2,486

Deferred tax liabilities:
Other assets	$	(69	)	$	—
Total deferred tax liabilities	$	(69	)	$	—

December 22, 2017,

the Tax Cuts and Jobs Act of

2017,

or the TCJA, was enacted. This tax reform legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of

34%

21%

effective on

January 1, 2018.

As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the

21%

rate. This resulted in a decrease in the company’s net deferred tax asset and corresponding valuation allowance of

$21.4

million. As the Company maintained a full valuation allowance against its net deferred tax asset position in the United States, this revaluation did

not

result in an income tax expense or benefit in the prior period. The other provisions of the TCJA did

not

have a material impact on the

2017

2018

consolidated financial statements.

For the years ended

December

31,

2018

and

2017,

the Company had United Kingdom Net Operating Losses (U.K. NOLs) of

$2.9

million and

$11.1

million, respectively. U.S. federal net operating loss carry forwards for the years ended

December

31,

2018

and

2017

were

$54.7

million and

$160.5

million, respectively. U.S. State net operating loss carryforwards for the years ended

December

31,

2018

and

2017

were

$50.3

million and

$154.9

million, respectively.

The U.S. federal and state net operating loss carryforwards begin to expire in

2019

and

2019,

respectively and the U.K. NOLs can be carried forward indefinitely.

For the year ended

December 31, 2018,

the Company continues to recognize its deferred tax assets in the U.K. related to OI Limited. The Company also continues to recognize the deferred tax asset for future share based deductions related to OI Global. The Company has determined that it is more likely than

not

that this asset of

$1.1

million will be realized in the future. The Company continues to record a full valuation allowance against all other net deferred tax assets since it is

not

‘more likely than

not’

that these amounts will be realized.

The following table reflects the rollforward of the Company’s valuation allowance:

(in thousands)	2018			2017		2016
Beginning of year (January 1)	$	48,098		$	46,473	$	43,076
(Decrease) increase in valuation allowance		(30,107	)		1,625		3,397
End of year (December 31)	$	17,991		$	48,098	$	46,473

Interest and penalties related to uncertain tax positions are recorded in tax expense and totaled

$37,000,

and

for the years ended

December 31, 2018,

2017

and

2016,

respectively. The liability recorded for potential penalties and interest was

$37,000

and

as of

December 31, 2018

and

2017,

respectively. The Company had a total recorded liability of

$409,000

and

related to uncertain tax positions, inclusive of penalties and interest, as of

December 31, 2018

and

2017,

respectively, which is included in accrued liabilities in the consolidated balance sheets.

The Company did

not

have any gross uncertain tax positions prior to

December 31, 2017.

The aggregate changes in the balance of gross uncertain tax positions, which excludes interest and penalties, for the year ended

December 31, 2018

were as follows (in thousands):

Balance at December 31, 2017	$	—
Settlement/decreases related to tax positions taken during prior years		—
Increases related to tax positions taken during prior years		372
Increases related to tax positions taken during the current year		—
Balance at December 31, 2018	$	372

The Company generates research and development credits in the United Kingdom which are refundable if a current year loss is incurred. In the United Kingdom for the year ended

December

31,

2018,

amounts were reimbursed for research and development tax credits.

The SEC staff issued SAB

118

which allowed the Company to record provisional amounts for the impact of the TCJA during a measurement period which is similar to the measurement period used when accounting for business combinations. At

December 31, 2017,

the Company made a reasonable estimate of the effects of the TCJA on our existing deferred tax balances. As of

December 31, 2018

the Company has completed its review of the TCJA and noted

material changes to our initial assessment.