Note 11. 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 to pretax losses primarily because of changes in valuation allowance.

Pursuant to incorporation of the Company as a C corporation on March 29, 2017, BioXcel became the sole owner of the Company, and contributed certain assets to the Company in a tax free transaction. From the date of incorporation, the Company is a standalone C corporation subject to corporate income tax and the deferred taxes of the Company have been calculated accordingly.

The significant components of the Company’s net deferred tax assets at December 31, 2019 and 2018 are shown below. In determining the realizability of the Company’s net deferred tax asset, the Company considered numerous factors, including historical profitability, estimated future taxable income, and the industry in which it operates. Based on this information the Company has provided a valuation allowance for the full amount of its net deferred tax asset because the Company has determined that it is more likely than not that it will not be realized.


	2019		2018
Federal net operating losses	$	3,445	$	3,840
State net operating losses		972		1,300
Stock based compensation		860		552
Federal and state tax credits		1,254		366
Capitalized research and development costs		8,288		—
Accrued expense		432		203
Total gross deferred tax assets		15,251		6,261
Less: valuation allowance		(15,251)		(6,261)
Net deferred tax assets	$	—	$	—

A reconciliation between the Company’s effective tax rate and the federal statutory rate for the years ended December 31, 2019 and 2018 are as follows:



	2019		2018
Federal Statutory Rate	21.0	%	21.0	%
Stock based compensation	(1.4)		(2.2)
Federal and state credits	2.7		1.6
State Taxes	5.0		6.3
Change in valuation allowance	(27.3)		(26.5)
Other	-		(0.2)
Effective Tax Rate	0.0	%	0.0	%

At December 31, 2019, the Company had approximately $16,406 of gross federal and state net operating loss carry-forwards. If not utilized, the federal and state net operating loss carry-forwards will begin to expire in 2037. The federal net operating loss incurred after December 31, 2017 will be carried forward indefinitely. The utilization of such net operating loss carry-forwards and realization of tax benefits in future years depends predominantly upon having taxable income. The Company also has approximately $1,254 of federal research and development credits which will begin to expire in 2037 if not utilized.

Utilization of the net operating loss, or NOL, and research tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that has occurred or that could occur in the future, as required by Section 382 of the Code, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and research tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. To date, the Company’s NOLs have not been subject to Section 382 limitation.

Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2019 there were no uncertain positions. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. There was no income tax related interest and penalties included in the income tax provision. The Company's U.S. federal and state net operating losses have occurred since its inception in 2017 and as such, tax years subject to potential tax examination could apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing authorities.