12. Income taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax carryforwards, such as net operating losses. 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 be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the provision for income taxes in the period that includes the enactment date. The Company records a valuation allowance to reduce the carrying amount of deferred tax assets if it is more likely than not that such asset will not be realized. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in the law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity, and changes in facts or circumstances related to a tax position. The Company evaluates its tax positions on an annual basis.

On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation with the U.S. Tax Cuts and Jobs Act (“Tax Act”) that made changes to the U.S. tax code impacting the year ended December 31, 2017 and future years. Effective January 1, 2018, the Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%.

For the year ended December 31, 2017, the Tax Act required a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. At December 31, 2018, the Company does not have any foreign subsidiaries and the international aspects of the Tax Act are not applicable.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the date of the Tax Act enactment for companies to complete the accounting under Accounting Standards Codification 740—Income Taxes. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. The Company’s accounting for the Tax Act was completed in the fourth quarter of 2018 and resulted in no adjustments to the Company’s prior provisional estimates recorded in the period ended December 31, 2017.

The benefit for incomes taxes is as follows:


	Year ended December 31,
	2018		2017
	(in thousands)
Current
Federal	$	180	$	—
State		—		—
Total current		180		—
Deferred
Federal		—		—
State		—		—
Total deferred		—		—
Total tax expense	$	180	$	—

A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate at the Company’s effective tax rate is as follows:


	Year ended December 31,
	2018			2017			2016
Income tax computed at federal statutory tax rate		21.0	%		34.0	%		34.0	%
State taxes, net of federal benefit		6.3	%		6.1	%		5.6	%
General business credit carryovers		3.1	%		5.0	%		4.2	%
Non-deductible expenses		(2.1)	%		(4.1)	%		(4.0)	%
Deferred rate change		—	%		(21.8)	%		—	%
Change in valuation allowance		(28.1)	%		(19.2)	%		(40.2)	%
Total		0.2	%		—	%		(0.4)	%

The Company has incurred net operating losses (“NOLs”) since June 2013. At December 31, 2018, the Company had federal and state net operating loss carryforwards of $162.9 million and $163.8 million, respectively. During 2018, the company generated federal and state NOLs carryforwards of $73.1 million and $72.1 million, respectively. The federal net operating loss carryforward generated in 2018 is limited to 80% of taxable income and has an indefinite carryforward period. The Company’s federal net operating loss carryforward generated in the period ended December 31, 2017 and prior, as well as the Company’s state NOL carryforwards begin to expire in 2033. As of December 31, 2018, the Company also had federal and state research and development tax credit carryforwards of $9.4 million and $3.0 million, respectively, which expire beginning in 2028. As of December 31, 2018, the Company had state investment credits of $0.4 million, which expire beginning in 2019.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of NOL carryforwards and research and development credit carryforwards that may be utilized annually to offset future taxable income and taxes payable. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership of 5% stockholders or public groups in the stock of a corporation by more than 50 percent in the aggregate over a three-year period. During 2016, the Company completed a study through June 30, 2016, to determine whether any ownership change has occurred since the Company’s formation and has determined that transactions have resulted in three ownership changes, as defined by Section 382. There could be additional ownership changes in the future that could further limit the amount of NOLs and tax credit carryforwards that the Company can utilize.

The significant components of the Company’s deferred tax assets and (liabilities) as of December 31, 2018 and 2017 are as follows:


	Year ended December 31,
	2018		2017
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	44,556	$	24,642
Tax credit carryforwards		12,021		8,832
Deferred rent		1,560		1,458
Deferred revenue		13,926		8,622
Non-deductible accruals and reserves		1,105		817
Intangibles		930		832
Stock compensation		2,802		1,361
Total deferred tax assets		76,900		46,564
Less valuation allowance		(75,213)		(44,953)
Net deferred tax assets		1,687		1,611
Deferred tax liabilities
Depreciation and amortization		(1,687)		(1,611)
Net deferred taxes	$	—	$	—

As required by ASC 740, management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which principally comprise NOL carryforwards, research and development credit carryforwards, deferred revenue. Management has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets, and as a result, a valuation allowance of $75.2 million and $45.0 million has been established at December 31, 2018 and 2017, respectively. The change in valuation allowance was $30.2 million for the year ended December 31, 2018, primarily due to additional operating losses incurred by the Company for the year ended December 31, 2018. The primary reason for the difference between the income tax expense recorded by the Company and the amount of income tax expense at statutory income tax rates was the change in the valuation allowance.

At December 31, 2018 and 2017, the Company had no unrecognized tax benefits. The Company has not as yet conducted a study of its research and development credit carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed, and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheets or statements of operations if an adjustment were required.

Interest and penalty charges, if any, related to unrecognized tax benefits would be classified as income tax expense in the accompanying statements of operations. As of December 31, 2018 and 2017, the Company has no accrued interest related to uncertain tax positions. Since the Company is in a loss carryforward position, it is generally subject to examination by the U.S. federal, state, and local income tax authorities for all tax years in which a loss carryforward is available.