12. Income Taxes

For the years ended December 31, 2017, 2016, and 2015, the Company recognized no provision or benefit from income taxes. The difference between the Company’s provision for income taxes and the amounts computed by applying the statutory federal income tax rate to income before income taxes is as follows (in thousands):

	Year Ended December 31,
	2017			2016			2015
Tax provision derived by applying the federal statutory rate to income before income taxes	$	(9,260	)	$	(7,377	)	$	(3,841	)
Permanent differences and other		296			333			307
Federal tax credits		(1,294	)		(1,921	)		(321	)
State tax credits		(284	)		(404	)		—
Change in tax rate		7,869			—			—
Conversion of LLC from partnership to corporation		—			—			(21	)
Change in the valuation allowance		2,673			9,369			3,876
Income tax expense /(benefit)	$	—		$	—		$	—

The components of the deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2017			2016
Deferred tax assets
Net operating loss carryforward	$	12,170		$	12,286
Intangible assets		29			38
Accrued expense		333			335
Stock-based compensation		386			283
Federal tax credits		5,572			3,291
State tax credits		824			404
Other		75			76
Total deferred tax assets		19,389			16,713
Deferred tax liabilities
Depreciable assets	$	(63	)	$	(60	)
Total deferred tax liabilities		(63	)		(60	)
Less: Valuation allowance		(19,326	)		(16,653	)
Deferred tax assets, net	$	—		$	—

On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue Code. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates from a maximum of 35% to a flat 21% rate and reducing the orphan drug credit from 50% to 25% of qualifying expenditures, effective for tax years beginning after December 31, 2017. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate under the 2017 Tax Act, the Company revalued its deferred tax assets and liabilities as of December 31, 2017 resulting in a $7.9 million decrease in net deferred assets, with a corresponding reduction in the valuation allowance. The accounting for the income tax effects of the 2017 Tax Act and related adjustments were completed and included in the financial statements as of and for the year ended December 31, 2017.

The Company has established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation allowance increased by $2.7 million, $9.4 million, and $3.9 million during the years ended December 31, 2017, 2016, and 2015, respectively, primarily due to continuing loss from operations offset by the change in the tax rate due to the 2017 Tax Act.

As of December 31, 2017 and 2016, the Company had U.S. net operating loss carryforwards (“NOL”) of $58.0 million and $36.1 million, respectively. As of December 31, 2017 and 2016, the Company had U.S. tax credit carryforwards of $5.6 million and $3.3 million, respectively, and state tax credit carryforwards of $1.0 million and $612,000, respectively. The net operating loss and tax credit carryforwards will begin to expire in 2033, if not utilized. The net operating loss and credit carryforwards are subject to Internal Revenue Service adjustments until the statute closes on the year the net operating loss is utilized.

As part of the PATH Act of 2015, certain eligible companies have the ability to convert a portion of their research tax credits to offset payroll tax liabilities. As of December 31, 2017, the Company has converted $500,000 of its research tax credit to offset payroll tax liabilities, of which $416,000 is included within prepaid expenses and other current assets and $84,000 is included within other non-current assets in the consolidated balance sheet.

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 NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382 or 383 of the Internal Revenue Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Additionally, the separate return limitation year (“SRLY”) rules may apply to losses of the Company’s seven wholly-owned subsidiary corporations. The SRLY rules limit the consolidated group’s use of a subsidiary corporation’s net operating losses to the amount of income generated by the subsidiary corporation after it becomes a member of the group. Any limitation may result in expiration of a portion of the NOL or R&D 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. Additionally, the Company does not expect any unrecognized tax benefits to change significantly over the next twelve months. 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.

The Company files income tax returns in the U.S. and state jurisdictions. The Company is subject to examination by taxing authorities in its significant jurisdictions for the 2014 and subsequent years.