12. Income Taxes

The Company's effective tax rates for the years ended December 31, 2018, 2017 and 2016 differ from the U.S. federal statutory rate as follows:


	Year Ended December 31,
	2018				2017				2016
	(in thousands, except percentages)
U.S. federal taxes (benefit) at statutory rate	$	(26,800)	(21.00)	%	$	(46,206)	(34.00)	%	$	(32,277)	(34.00)	%
State tax expense		(4,468)	(3.50)	%		(6,559)	(4.83)	%		(2,842)	(2.99)	%
Research and development credits		(1,164)	(0.91)	%		(1,149)	(0.85)	%		(1,449)	(1.53)	%
Stock-based compensation		(3,148)	(2.47)	%		(5,036)	(3.71)	%		1,275	1.34	%
Change in federal tax rate		—	0.00	%		44,701	32.89	%		—	0.00	%
Mark to market fair value adjustments		865	0.68	%		(390)	(0.29)	%		49	0.05	%
Nondeductible settlement for claims		1	0.00	%		3,873	2.85	%		—	0.00	%
Other nondeductible items		885	0.69	%		1,009	0.74	%		933	0.99	%
Change in valuation allowance		34,150	26.76	%		10,211	7.51	%		34,453	36.29	%
Provision for income taxes	$	321	0.25	%	$	454	0.31	%	$	142	0.15	%

During the year ended December 31, 2018, the Company recorded total income tax expense of $0.3 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 $0.1 million for the year ended December 31, 2018.

During the year ended December 31, 2017, the Company recorded total income tax expense of $0.4 million, which included foreign income tax expense of $0.2 million and state income tax expense of $0.2 million. 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.

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,
	2018		2017
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	95,321	$	77,356
Research and development tax credit carryforwards		15,632		12,675
Reserves and accruals		7,922		3,404
Stock-based compensation		4,076		2,929
Total deferred tax assets before valuation allowance		122,951		96,364
Less: valuation allowance		(122,441)		(95,817)
		510		547
Deferred tax liabilities:
Property and equipment		(510)		(547)
Net deferred tax assets	$	—	$	—

The Company established a full valuation allowance against its net deferred tax assets in 2018 and 2017 due to the uncertainty surrounding realization of these assets. The valuation allowance increased to $122.4 million as of December 31, 2018 from $95.8 million as of December 31, 2017. The valuation allowance increased during 2018 due to current year losses and credits claimed, offset by a reduction due to the adoption of ASC 606. The valuation allowance increased to $95.8 million as of December 31, 2017 from $85.6 million as of December 31, 2016.

In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act of 2017 (“Tax Act”). 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 Tax 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 Tax Act. The Company made provisional adjustments to reduce its deferred tax assets and liabilities as of December 31, 2017, 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. As of December 31, 2018, the Company completed its assessment of the tax rate change and determined no additional adjustments are required.

As of December 31, 2018, the Company had federal and state net operating loss (“NOLs”) carryforwards of approximately $394.0 million and $201.4 million, respectively, which begin to expire in 2027 and 2028, respectively, if not utilized.

The Company also had federal research and development credit carryforwards of approximately $14.1 million, which begin to expire in 2027, and state research and development credit carryforwards of approximately $10.5 million, which can be carried forward indefinitely. Realization of these deferred tax assets would require $488.1 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,
	2018		2017		2016
	(in thousands)
Balance at beginning of year	$	5,945	$	4,293	$	2,405
Additions based on tax positions related to the current year		1,416		1,651		1,836
Additions for tax positions of prior years		1		1		52
Balance at end of year	$	7,362	$	5,945	$	4,293

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, 2018, 2017 and 2016, the amount of unrecognized tax benefits increased $1.4 million, $1.7 million, and $1.9 million, respectively, due to additional research and development credits generated during the year. As of December 31, 2018, 2017 and 2016, the total amount of unrecognized tax benefits was $7.4 million, $5.9 million and $4.3 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, 2019.

The Company recognizes any interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2018, there were no accrued interest and penalties related to uncertain tax positions.