11. Income Taxes

The Company's effective tax rates for the years ended December 31, 2017, 2016 and 2015 differ from the U.S. federal statutory rate as follows:


	Year Ended December 31,
	2017				2016				2015
	(in thousands, except percentages)
U.S. federal taxes (benefit) at statutory rate	$	(46,206)	(34.00)	%	$	(32,277)	(34.00)	%	$	(24,375)	(34.00)	%
State tax expense		(6,559)	(4.83)	%		(2,842)	(2.99)	%		(2,428)	(3.39)	%
Research and development credits		(1,149)	(0.85)	%		(1,449)	(1.53)	%		(751)	(1.05)	%
Stock-based compensation		(5,036)	(3.71)	%		1,275	1.34	%		1,683	2.35	%
Change in federal tax rate		44,701	32.89	%		—	0.00	%		—	0.00	%
Mark to market fair value adjustments		(390)	(0.29)	%		49	0.05	%		504	0.70	%
Nondeductible settlement for claims		3,873	2.85	%		—	0.00	%		—	0.00	%
Other nondeductible items		1,009	0.74	%		933	0.99	%		841	1.17	%
Change in valuation allowance		10,211	7.51	%		34,453	36.29	%		24,526	34.21	%
Provision for income taxes	$	454	0.31	%	$	142	0.15	%	$	—	—	%

During the year ended December 31, 2017, the Company recorded total income tax expense of $0.4 million. The Company provides testing to clinics and also licenses its cloud-based software to licensees that are based in a foreign country, which contributed to a foreign income tax expense of $0.2 million. Total income tax expense also included a state income tax expense of $0.2 million for the year ended December 31, 2017. During the year ended December 31, 2016, the Company did not record any income tax expense given its history of losses, with the exception of $0.1 million of foreign withholding tax in 2016. As the provision for income taxes was not significant for the year ended December 31, 2015, any income taxes were reclassified out of other income and expenses.

Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss and tax credit carryforwards. The components of the net deferred income tax assets are as follows:


	December 31,
	2017		2016
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	77,356	$	68,504
Research and development tax credit carryforwards		12,675		8,634
Reserves and accruals		3,404		5,719
Stock-based compensation		2,929		3,220
Total deferred tax assets before valuation allowance		96,364		86,077
Less: valuation allowance		(95,817)		(85,606)
		547		471
Deferred tax liabilities:
Property and equipment		(547)		(471)
Net deferred tax assets	$	—	$	—

The Company established a full valuation allowance against its net deferred tax assets in 2017 and 2016 due to the uncertainty surrounding realization of these assets. The valuation allowance increased to $95.8 million as of December 31, 2017 from $85.6 million as of December 31, 2016. The increase in the valuation allowance was primarily driven by the net loss in the year ended December 31, 2017, current year credits, and the adoption of ASU 2016-09, offset by a decrease resulting from lower federal tax rate.

In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act of 2017. As a result, corporate tax rate was reduced to 21%, effective January 1, 2018. ASC 740, Income Taxes, requires entities to recognize the effect of the tax law changes in the period of enactment. Shortly after the enactment of the Act, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when an entity does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company has made adjustments to reduce its deferred tax assets and liabilities by $42.1 million and $0.2 million, respectively, based on the reduction of the U.S. federal corporate tax rate from 34% to 21% and assessed the realizability of its deferred tax assets based on its current understanding of the provisions of the new law. A corresponding net reduction to valuation allowance of $42.2 million has been made for the year ended December 31, 2017. The Company considers its accounting for the impacts of the new law to be provisional and the Company will continue to assess the impact of the recently enacted tax law (and expected further guidance from federal and state tax authorities as well as further guidance for the associated income tax accounting) on its business and consolidated financial statements over the next 12 months.

As of December 31, 2017, the Company had federal and state net operating loss (“NOLs”) carryforwards of approximately $319.6 million and $165.5 million, respectively, which begin to expire in 2027 and 2028, respectively, if not utilized. As a result of certain realization requirements of ASC 718, the deferred tax assets and liabilities shown in the table above do not include certain deferred tax assets as of December 31, 2016 that arose directly from the tax deductions related to equity compensation in excess of compensation recognized for financial statement presentation purposes. These deferred tax assets were recorded upon the adoption of ASU 2016-09 effective January 1, 2017.

The Company also had federal research and development credit carryforwards of approximately $11.7 million, which begin to expire in 2028, and state research and development credit carryforwards of approximately $8.1 million, which can be carried forward indefinitely. Realization of these deferred tax assets would require $382.8 million in taxable income to fully utilize. Realization is dependent on generating sufficient taxable income prior to expiration of the loss and credit carryforwards.

Federal and California tax laws impose substantial restrictions on the utilization of NOLs and credit carryforwards in the event of an "ownership change" for tax purpose, as defined in Section 382 of the Internal Revenue Code. Accordingly, the Company's ability to utilize these carryforwards may be limited as the result of such ownership change. Such a limitation could result in limitation in the use of the NOLs in future years and possibly a reduction of the NOLs available.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:


	Year Ended December 31,
	2017		2016		2015
	(in thousands)
Balance at beginning of year	$	4,293	$	2,405	$	1,360
Additions based on tax positions related to the current year		1,651		1,836		1,045
Additions for tax positions of prior years		1		52		—
Balance at end of year	$	5,945	$	4,293	$	2,405

The Company adopted the provisions of ASC 740-10-50, Accounting for Uncertainty in Income Taxes, on January 1, 2009. During the years ended December 31, 2017, 2016 and 2015, the amount of unrecognized tax benefits increased $1.7 million, $1.9 million, and $1.0 million, respectively, due to additional research and development credits generated during the year. As of December 31, 2017, 2016 and 2015, the total amount of unrecognized tax benefits was $5.9 million, $4.3 million and $2.4 million, respectively. The reversal of the uncertain tax benefits would not affect the Company's effective tax rate to the extent that it continues to maintain a full valuation allowance against its deferred tax assets.

The Company is subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations, and require significant judgment to apply. The Company is subject to U.S. federal, state and local tax examinations by tax authorities for all prior tax years since incorporation. The Company does not anticipate significant changes to its current uncertain tax positions through December 31, 2018.

The Company recognizes any interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2017, there were no accrued interest and penalties related to uncertain tax positions.