Income Taxes

The provision for income taxes for the years ended December 31, 2018 and 2017 was comprised as follows (in thousands):



	Year Ended December 31,
	2018		2017
Current taxes:
Federal	$	—	$	—
State	46		36
Total current taxes	46		36
Deferred taxes:
Federal	—		—
State	—		—
Total deferred taxes	—		—
Total provision for income taxes	$	46	$	36

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to United States income tax law. Among these changes, the federal statutory tax rate was reduced to 21%, net operating loss (“NOL”) carrybacks are no longer permitted and NOLs generated in years beginning after December 31, 2017 may be carried forward indefinitely, subject to a limitation of 80% of taxable income.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant 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. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its consolidated financial statements as of and for the year ended December 31, 2017. In accordance with SAB 118, the Company determined that the revaluation of its deferred tax assets and associated valuation allowance reduction of $9.4 million were provisional amounts as of December 31, 2017. The accounting for the tax effects of the Tax Act was completed during the year ended December 31, 2018, and no adjustments were made to these provisional amounts.

A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:



	Year Ended December 31,
	2018		2017
Income tax computed at federal statutory tax rate	21.0	%	34.0	%
Deferred tax effects from the Tax Act	—	%	(57.2	)%
State taxes, net of federal benefit	10.3	%	4.7	%
Tax credit carryforwards	12.2	%	26.8	%
Non-deductible income (expense)	—	%	(4.9	)%
Change in valuation allowance	(42.7	)%	(1.8	)%
Other	(1.0	)%	(1.8	)%
Effective tax rate	(0.2	)%	(0.2	)%

The principal components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 were comprised as follows (in thousands):



	December 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	37,417		$	26,926
Tax credit carryforwards	12,751			8,432
Deferred revenue	26,739			31,735
Deferred lease incentive	103			120
Deferred rent	476			431
Intangibles	552			237
Accrued expenses and other	1,091			995
Unrealized loss on available-for-sale securities	39			112
Stock-based compensation	2,119			713
Total deferred tax assets	81,287			69,701
Less: valuation allowance	(55,348		)	(30,850		)
Net deferred tax assets	25,939			38,851
Deferred tax liabilities:
Section 481(a) method change	(25,653		)	(38,481		)
Depreciation	(286		)	(370		)
Total deferred tax liabilities	(25,939		)	(38,851		)
Net deferred taxes	$	—		$	—

The Company has incurred NOLs since inception. As of December 31, 2018, the Company had federal and state NOL carryforwards of $136.4 million and $138.7 million, respectively. Federal NOLs generated through the year ended December 31, 2017 expire at various dates from 2032 through 2037, and federal NOLs generated during the year ended December 31, 2018 may be carried forward indefinitely. State NOLs expire at various dates from 2032 through 2038. As of December 31, 2018, the Company had federal research and development tax credit carryforwards of $9.3 million which expire at various dates from 2032 through 2038. In addition, as of December 31, 2018, the Company had state research and development and investment tax credit carryforwards of $3.8 million and $0.6 million, respectively. The state research and development tax credit carryforwards expire at various dates from 2029 through 2033 and the state investment tax credit carryforwards expire at various dates from 2019 through 2021.

Management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are principally comprised of NOL carryforwards, tax credit carryforwards, deferred revenue and stock-based compensation. Management has determined that it is more likely than not that the Company will not realize the benefits of its deferred tax assets, and as a result, a valuation allowance of $55.3 million has been established at December 31, 2018. The increase in the valuation allowance of $24.5 million during the year ended December 31, 2018 was primarily due to the increase in the deferred tax asset related to deferred revenue upon the adoption of ASC 606 as well as the additional operating loss generated by the Company.

NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code (“IRC”). This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change. An IRC Section 382 study, completed in August 2016, identified three previous ownership changes for purposes of IRC Section 382. As a result of these ownership changes, the Company’s NOL and tax credit carryforwards allocable to the periods preceding each such ownership change are subject to limitations under IRC Section 382. Subsequent ownership changes may further affect the limitation in future years.

The Company had no unrecognized tax benefits as of either December 31, 2018 or 2017. During the year ended December 31, 2017, the Company completed a study of its research and development credit carryforwards generated during the years ended December 31, 2016 and 2015. The Company has not conducted a study of its research and development credit carryforwards generated during the year ended December 31, 2018. 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 credit carryforwards, 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 consolidated statements of operations if an adjustment were required.

Interest and penalty charges, if any, related to income taxes would be classified as a component of the provision for income taxes in the consolidated statements of operations. As of December 31, 2018, the Company has not incurred any interest or penalty charges.

The Company files income tax returns in the United States federal tax jurisdiction and the Massachusetts state tax jurisdiction. Since the Company is in a loss carryforward position, it is generally subject to examination by federal and state tax authorities for all tax years in which a loss carryforward is available.