Income Taxes

12 Months Ended

Dec. 31, 2018

During the years ended December 31, 2018, 2017, and 2016 we did not record an income tax benefit related to our loss before income taxes in the statement of operations and comprehensive loss because a valuation allowance has been required to be established for all deferred tax assets due to our cumulative net loss position.

The components of our provision for income taxes are as follows:


	Year Ended December 31,
	2018		2017		2016
Tax at federal statutory rate	21.0	%	35.0	%	35.0	%
State, net of federal benefit	4.0		3.0		2.8
Permanent items	0.1		(1.1)		(0.5)
Research and development ("R&D") tax credit	1.3		1.2		1.3
Federal tax rate change	—		(92.6)		—
Other	(0.1)		1.1		7.1
Change in valuation allowance	(26.3)		53.4		(45.7)
Total	—	%	—	%	—	%

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("the Act") was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We accounted for the impact of the Act in our 2017 income tax provision, the period in which the legislation was enacted. The amount recorded related to the remeasurement of our deferred tax assets and liabilities, based on the lower tax rates at which they are expected to reverse in the future, was $16.2 million of expense. This tax expense was entirely offset by an income tax benefit related to the reduction of our deferred tax asset valuation allowance of the same amount, resulting in no net impact to tax expense or benefit. We did not have any foreign earnings and therefore are not subject to any one-time transition tax on the mandatory deemed repatriation of foreign earnings. The amounts reported in 2017 were based on provisional estimates based on our understanding of the Act and guidance available as of the date of filing. In 2018, the accounting impact was finalized and no changes were required to adjust the provisional amounts recorded.

New tax laws under the Act came into effect in the current year changing the net operating loss ("NOL") carryforward period, interest expense deductibility, and other expense limitations. The NOLs generated in the current year and going forward have an indefinite life carryforward period and can only offset future income by 80%. Prior to the Act, NOLs could offset income 100% and be carried forward 20 years. The Act limited interest expense to 30% of taxable income with the disallowed amount carried forward indefinitely. Since we are in a loss, all interest expense is disallowed. We have recorded a deferred tax asset for the limited interest expense, fully offset by a valuation allowance. Other impacts of the Act disallowed certain nontaxable fringe benefits and expanded the limitation on meals and entertainment. The Act also removes the ‘performance-based’ exception for the $1 million limitation on executive compensation. Since we have a full valuation allowance, there was no impact to current or deferred tax expense in the current year.

Significant components of net deferred tax assets and liabilities were as follows:


	Year Ended December 31,
	2018		2017		2016
Deferred tax assets:
Net operating losses	$	31,120	$	27,827	$	36,626
R&D tax credits	1,916		1,368		1,093
R&D expenditures, capitalized for tax	2,549		2,146		2,682
Interest expense carryforward	638		—		—
Accruals and other	1,688		753		1,065
Depreciation and amortization	31		4		—
Other comprehensive loss	16		—		—
Total deferred tax assets	37,958		32,098		41,466

Deferred tax liabilities:
Depreciation and amortization	—		—		(4)
Other	(101)		—		—
Total deferred tax liabilities	(101)		—		(4)

Net deferred tax assets	37,857		32,098		41,462
Valuation allowance	(37,857)		(32,098)		(41,462)
	$	—	$	—	$	—

Deferred income taxes reflect the tax effects of net operating loss and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

As of December 31, 2018, our gross federal net operating loss carryforwards of $124.7 million will expire at various dates beginning in 2028. In addition, net operating loss carryforwards for state income tax purposes of $115.3 million that include net operating losses that will begin to expire in 2028. We also have R&D credit carryforwards of $1.9 million as of December 31, 2018 of which will expire at various dates beginning in 2032.

Utilization of the net operating loss carryforwards may be subject to an annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions. We have not performed a detailed analysis to determine whether an ownership change has occurred. Such a change of ownership would limit our utilization of the net operating losses and could be triggered by subsequent sales of securities by us or our stockholders.

Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence and cumulative losses, we believe it is more likely than not that the deferred tax assets are not recognizable and will not be recognizable until we have sufficient taxable income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $5.8 million, decreased by $9.4 million, and increased by $8.5 million during the years ended December 31, 2018, 2017 and 2016, respectively.

We had no unrecognized tax benefits as of December 31, 2018 and 2017. We file income tax returns in the U.S. federal and various state jurisdictions. The 2014 to 2017 tax years remain open to examination by the major taxing authorities to which we are subject. We do not expect a significant change to our unrecognized tax benefits over the next 12 months.

Our policy is to record interest related to uncertain tax positions as interest expense and any penalties as other expense in our statements of operations and comprehensive loss. There was no interest or penalties accrued at December 31, 2018 and 2017.