INCOME TAXES

12 Months Ended

Dec. 31, 2019

The Company recorded a tax benefit of $0.1 million during the year ended December 31, 2019 and did not record a provision or benefit for income taxes during the years ended December 31, 2018 and 2017. The significant components of the Company’s net deferred tax assets as of December 31, 2019 and 2018 are shown below.


	December 31,
(in thousands)	2019		2018
Deferred tax assets
Net operating loss carryforwards	$	82,252	$	45,215
Research and development credits	8,968		4,090
Capitalized assets	79		23
Accruals and reserves	651		390
Operating lease liabilities	2,070		806
Stock-based compensation	4,250		—
Gross deferred tax assets	98,270		50,524
Deferred tax liabilities
Operating lease right-of-use assets	(1,969)		—
Gross deferred tax liabilities	(1,969)		—
Total net deferred tax assets	96,301		50,524
Less: valuation allowance	(96,301)		(50,524)
Net deferred tax assets	$	—	$	—

A valuation allowance is established when it is more likely than not that a deferred tax asset will not be realized. As of December 31, 2019 and 2018, the Company's valuation allowance was $96.3 million and $50.5 million, respectively. The valuation allowance increased by $45.8 million for the year ended December 31, 2019. The increase in the 2019 valuation allowance was primarily due to the addition of the 2019 net operating loss carryforwards.

The following is a reconciliation between the U.S. federal income statutory tax rate and the Company’s effective tax rate for the years ended December 31, 2019, 2018 and 2017.


	Years Ended December 31,
	2019		2018		2017
U.S. federal statutory rate	21.0	%	21.0	%	34.0	%
State income taxes, net of federal benefit	—		—		5.8
Stock-based compensation	2.2		(0.2)		(0.7)
Permanent adjustments	(0.1)		(0.1)		4.2
Change to valuation allowance	(25.9)		(21.9)		(19.6)
Tax Cuts and Jobs Act Impact	—		—		(25.4)
Research and development credits	2.8		1.3		1.6
Net unrealized gain on available-for-sale investments	0.1		—		—
Other	—		(0.1)		—
Effective tax rate	0.1	%	—	%	—	%

On December 22, 2017, the Tax Cut and Jobs Act, or Tax Act, was signed into law. Among other changes under the Tax Act was a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the reduction in the corporate income tax rate, the Company revalued its net deferred tax assets at December 31, 2018, as the changes in tax law are accounted for in the period of enactment, resulting in a reduction in the value of our net deferred tax assets of approximately $10.5 million, offset by a $10.5 million change in valuation allowance as of that date.

As of December 31, 2019, the Company had approximately $361.9 million of federal net operating losses available for future use. Federal net operating losses incurred prior to January 1, 2018 of approximately $89.1 million expire beginning in 2033 while federal net operating losses incurred after December 31, 2017 of approximately $272.8 million will have an indefinite carryforward period, subject to annual limitations. Federal research credits of approximately $8.0 million that are available for future use expire beginning in 2033.

At December 31, 2019, the Company also had approximately $89.6 million of state net operating losses available for future use that expire beginning in 2033 and state research credits of approximately $4.2 million that have no expiration date.

Utilization of the net operating loss carryforwards and the research and development credits carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Sections 382 and 383 of the Internal Revenue Code of 1986, or the Code, as amended, as well as similar state and foreign provisions.

The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future. If the Company has experienced an ownership change at any time since its formation, utilization of the net operating loss or research credit carryforwards would be subject to an annual limitation under Section 382 of the Code. Such limitation is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term and tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss or research credit carryforwards before utilization. Further, until a study is completed, and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

ASC Topic 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. As of December 31, 2019 and 2018, the Company had unrecognized tax benefits of $2.5 million and $1.3 million, respectively. The amount of unrecognized tax benefits is not expected to significantly change over the next twelve months. No amounts, outside of valuation allowance, would impact the effective tax rate on continuing operations. The beginning and ending gross unrecognized tax benefits amounts are as follows.


	Years Ended December 31,
(in thousands)	2019		2018		2017
Gross unrecognized tax benefits at beginning of year	$	1,297	$	819	$	574
Additions for tax positions related to prior year	—		—		2
Decrease related to prior year tax provisions	—		—		(92)
Additions for tax positions related to current year	1,246		478		335
Gross unrecognized tax benefits at end of year	$	2,543	$	1,297	$	819

It is the Company’s policy to include penalties and interest expense related to income taxes as a component of income tax expense as necessary. Management determined that no accrual for interest and penalties was required as of December 31, 2019.

The Company’s tax jurisdictions are the United States and California. The Company’s tax years from 2013 to 2019 will remain open for examination by the federal and state authorities for three and four years respectively, from the date of utilization of any net operating loss or tax credits. The Company is not currently subject to income tax examinations by any authority.