14. Income taxes

Provision for income taxes

There is no provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates and pretax losses primarily because of changes in valuation allowance.

Deferred tax assets and valuation allowance

Deferred tax assets reflect the tax effects of net operating losses (“NOLs”) and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The most significant item of deferred tax assets is derived from the Company’s federal NOLs. At December 31, 2019, the Company had a U.S. federal NOL carryforward available to offset future taxable income of $146.4 million. This includes the $7.1 million of gross NOLs that are limited under Sec. 382. Of the $146.4 million, $49.0 million will begin to expire in 2035 and $97.4 million have an indefinite carryforward period and NOL carryforwards will be limited to 80% of taxable income in future years. As of December 31, 2019, the Company had state NOL carryforwards of $13.9 million which have a 12-year carryforward period and will begin to expire starting in 2027.

A reconciliation of the U.S statutory rate to the Company’s effective tax rate is as follows:


Year ended December 31,	2019		2018
Federal rate	21.0	%	21.0	%
State rate	7.5		7.5
Valuation allowance	(28.6)		(26.8)
Other	0.1		(1.7)
	—	%	—	%

The significant components of the Company’s net deferred tax assets are as follows (in thousands):


December 31,	2019		2018
Deferred tax assets
Net operating loss	$	41,727	$	27,749
Stock‑based compensation		2,603		—
Accrued clinical trials		176		322
Accrued compensation		509		582
Accrued expenses and other, net		383		374
Total deferred tax assets		45,398		29,027
Less valuation allowance		(45,398)		(28,963)
Net deferred tax assets		—		64
Deferred tax liabilities
Stock‑based compensation and other, net		—		(64)
Net deferred taxes	$	—	$	—

Pursuant to Section 382 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 tax credit carryforwards that may be used in future years. Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 (“IRC Section 382”) due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. During 2018, the Company performed a detailed analysis of their historical and current IRC Section 382 ownership changes that may limit the utilization of NOL carryforwards. Except for approximately $7.1 million of NOLs arising prior to the Company’s Series A preferred stock financing in May 2016, the entire remaining NOL carryforward is available for immediate use based on the IRC Section 382 analysis performed. There could also be additional ownership changes in the future which may result in limitations on the utilization of NOL carryforwards and credits.

The Company files federal and state income tax returns and, in the normal course of business, the Company is subject to examination by these taxing authorities. As of December 31, 2019, the Company’s tax years through December 31, 2015 are subject to examination by the U.S. federal and state taxing authorities. The December 31, 2018 tax year is currently under examination by the Internal Revenue Service.