5. Income Taxes

The Company did not record net income tax benefits for the operating losses incurred during the periods presented due to the uncertainty of realizing a tax benefit from those losses. Accordingly, any benefit recorded related to these deferred tax assets was offset by a valuation allowance reflecting management’s conclusion that realization of those assets was not more likely than not.

Intraperiod tax allocation rules require the allocation of the provision for income taxes between continuing operations and other categories of earnings, such as items credited directly to members’ equity. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and has pre-tax income in other categories of earnings, the Company must allocate the income tax provision to the other categories of earnings. The Company then records a related income tax benefit in continuing operations.

During the year ended December 31, 2015, the Company allocated $2.6 million from the $30.0 million total fixed amount of consideration under the collaboration agreement with Novartis to the carrying value of the Class A-1 and A-2 Preferred Units to record those units based on their fair value at date of issuance. As a result of this allocation, during the year ended December 31, 2015, the Company recorded an income tax provision of $1.0 million within members’ equity as well as a corresponding income tax benefit of $1.0 million within continuing operations. Refer to Note 7, Collaborations, for additional information regarding this difference in value.

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

	Year Ended December 31,
	2017			2016			2015
Federal statutory income tax rate		(34.0	)%		(34.0	)%		(34.0	)%
State income taxes		(6.9	)		(6.7	)		(4.4	)
Intraperiod tax allocation		-			-			(6.7	)
Permanent items		-			-			2.2
Research and development tax credits		(3.4	)		(2.8	)		(1.8	)
Stock-based compensation		3.6			1.9			1.1
Change in U.S. tax rate		18.7			-			-
Change in valuation allowance		22.0			41.6			36.0
Effective income tax rate		-	%		-	%		(7.6	)%

The Company’s net deferred tax assets (liabilities) consisted of the following:

	December 31,
	2017			2016
	(in thousands)
Deferred tax assets:
Intangibles, including acquired in-process research and development	$	1,303		$	2,035
Capitalized start-up costs		502			785
Net operating loss carryforwards		9,406			13,751
Research and development credit carryforwards		5,817			1,873
Deferred revenue		15,913			1,193
Equity-based compensation		3,248			1,940
Accruals and allowances		1,112			1,139
Gross deferred tax assets		37,301			22,716
Deferred tax asset valuation allowance		(35,372	)		(20,549	)
Total deferred tax assets		1,929			2,167
Deferred tax liabilities:
Fixed assets		(1,929	)		(2,167	)
Total deferred tax liabilities		(1,929	)		(2,167	)
Net deferred tax asset (liability)	$	-		$	-

As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $36.7 million and $27.8 million, respectively, which begin to expire in 2034. As of December 31, 2017, the Company had federal and state research and development tax credit carryforwards of approximately $3.4 million and $2.5 million, which begin to expire in 2034 and 2030, respectively.

The Company evaluated the expected realizability of its net deferred tax assets as of December 31, 2017 and 2016 and determined that there was significant negative evidence due to its net operating loss position and insufficient positive evidence to support the realizability of these net deferred tax assets. The Company concluded it is more likely than not that its net deferred tax assets would not be realized in the future; therefore, the Company has provided a full valuation allowance against its net deferred tax asset balance as of December 31, 2017 and 2016. The valuation allowance increased by $14.8 million in 2017, $13.1 million in 2016 and $3.8 million in 2015.

Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax expense, respectively. The Company has not yet conducted a study to assess whether a change of control, as defined in Section 382, has occurred or whether there have been multiple changes in control since inception.

As of December 31, 2017, the Company had not identified any unrecognized tax benefits. The Company files income tax returns in the U.S. federal tax jurisdiction and Massachusetts and various other state tax jurisdictions. The Company is subject to examination by the Internal Revenue Service and Massachusetts taxing authorities. The returns in these jurisdictions since inception remain open for examination; however, there are currently no pending tax examinations.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. This law substantially amended the Internal Revenue Code and among other things, permanently reduced the U.S. corporate income tax rate from 35% to 21%. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the recording of provisional amounts during a measurement period not to extend beyond one year of the enactment date. As a result of remeasuring the deferred tax assets and liabilities to the lower tax rate, the net deferred tax assets decreased by $12.6 million, which was offset by a decrease in the valuation allowance. In accordance with SAB 118, the amount the Company recorded is a provisional amount and a reasonable estimate at December 31, 2017. The final impact may differ from this provisional amount due to, among other things, changes in interpretations and assumptions the Company has made thus far and the issuance of additional regulatory or other guidance. The Company expects to complete the measurement of the final impact within the one year measurement period.