Note 9. Income Taxes

For financial reporting purposes, “loss before provision for income taxes,” includes the following components:

	For the Year Ended December 31,
	2016			2015			2014
	(in thousands)
Domestic	$	(59,668	)	$	(26,458	)	$	(10,819	)

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes for the years ended December 31, 2016, 2015 and 2014 was immaterial.

Income tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax rate of 35% to pretax loss as follows:

	For the Year Ended December 31,
	2016			2015			2014
	(in thousands)
At statutory rate	$	(20,884	)	$	(9,260	)	$	(3,788	)
State taxes		1			1			1
Change in valuation allowance		25,483			10,263			3,998
Tax credits		(5,098	)		(1,347	)		(345	)
Stock-based compensation		445			160			60
Other		53			183			74
Total	$	—		$	—		$	—

Deferred Tax Assets and Liabilities

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

	For the Year Ended December 31,
	2016			2015
	(in thousands)
Deferred tax assets:
Federal and state net operating loss carryforward	$	34,921		$	14,286
Research and other credits		11,876			2,858
Intangibles		1,714			1,211
Reserves and accruals		1,802			690
Stock-based compensation		326			22
Start-up costs		160			174
Other		1,091			141
Total gross deferred tax assets		51,890			19,382
Less valuation allowance		(50,678	)		(19,350	)
Total deferred tax assets		1,212			32
Deferred tax liabilities:
Other intangibles		(3,260	)		(3,260	)
Property, plant and equipment		(1,212	)		(32	)
Total gross deferred tax liability		(4,472	)		(3,292	)
Net deferred tax liability	$	(3,260	)	$	(3,260	)

Realization of the Company’s deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Due to a lack of earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2016 and 2015, the Company had a net operating loss carryforward for federal income tax purposes of $77.3 million and $31.9 million, respectively, which will begin to expire in 2033. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The Company has not performed an ownership changes analysis.

The Company has federal credits of $13.5 million, which will begin to expire in 2033 and state research credits of approximately $1.3 million that have no expiration date. These tax credits are subject to the same limitations discussed above.

Unrecognized Tax Benefits

The Company has incurred net operating losses since inception and has no significant unrecognized tax benefits. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations. If in the future the Company recognizes uncertain tax positions, the Company’s effective tax rate will be reduced. Currently, the Company has a full valuation allowance against its net deferred tax asset that would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to uncertain tax positions would result in an adjustment of net operating loss or tax credit carryforwards rather than resulting in a cash outlay.

Income tax returns are filed in the U.S. and California. The Company is not currently under examination. Due to net operating losses and research credit carryovers, all of the tax years remain open to examination.

Unrecognized tax benefits were as follows:

	For the Year Ended December 31,
	2016		2015		2014
	(in thousands)
Beginning balance	$	714	$	121	$	15
Tax positions related to current year:
Federal and state		2,256		593		106
Ending balance	$	2,970	$	714	$	121

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next 12 months due to tax examination changes, settlement activities, expirations of statute limitations or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. During the year ended December 31, 2016, 2015 and 2014, no interest or penalties were recognized relating to unrecognized tax benefits.