Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes

Income Taxes

11.         Income Taxes

As a company incorporated in Bermuda, the Company is principally subject to taxation in Bermuda. Under the current laws of Bermuda, tax on a company’s income is assessed at a zero percent tax rate. As a result, the Company has not recorded any income tax benefits from its losses incurred in Bermuda during each reporting period, and no net operating loss carryforwards will be available to the Company for those losses.

In July 2020, the IRS issued final regulations regarding Foreign Derived Intangible Income (“FDII”), which was enacted as part of the U.S. Tax Cuts and Jobs Act in December 2017. The final FDII requirements outlined in the 2020 guidance did not materially impact the Company’s income taxes.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was enacted to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act made various tax law changes, including, among other things: (i) modifications to the federal net operating loss rules, including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and eliminating the 80% of taxable income limitations in years 2018-2020; (ii) enhanced recoverability of alternative minimum tax credit carryforwards; and (iii) delayed payment of employer payroll taxes. On December 27, 2020 updates to the CARES Act were enacted which provided the temporary allowance of a full deduction for business meals paid or incurred between December 31, 2020 and January 1, 2023. The Company will continue to monitor for any updates but currently the only material impact to the Company’s tax provision is the ability to defer employer payroll taxes for which the Company will not get a deduction until the amounts are paid.

In August 2015, the Company entered into agreements with its wholly owned subsidiary, Kiniksa US, under which Kiniksa US provides management and research and development services to the Company for which the Company pays costs plus a service fee.

In connection with its launch readiness activities, the Company transferred all of its rights, title and interest in, among other things, certain contracts (including the Regeneron Agreement), intellectual property rights, product filings and approvals and other information, plans and materials owned or controlled by the Company insofar as they related exclusively or primarily to rilonacept to Kiniksa UK in January 2021 pursuant to an asset transfer agreement between the Company and Kiniksa UK for the consideration described therein.

Loss before benefit (provision) for income taxes consisted of the following:

	Years Ended
	December 31,
	2020		2019		2018
Bermuda	$	(161,983)	$	(168,053)	$	(105,562)
Foreign (U.S., U.K., Germany, France, Switzerland)		5,754		4,139		2,121
	$	(156,229)	$	(163,914)	$	(103,441)

The components of the Company’s income tax (provision) benefit were as follows:

	Years Ended
	December 31,
	2020		2019		2018
Current income tax provision:
Bermuda	$	—	$	—	$	—
U.S. federal		(392)		(567)		(547)
U.S. state		(366)		(530)		(217)
Foreign (U.K., Germany, France, Switzerland)		(33)		(12)		—
Total current income tax provision		(791)		(1,109)		(764)
Deferred income tax (provision) benefit:
Bermuda		—		—		—
U.S. federal		(3,056)		2,397		542
U.S. state		(1,315)		759		436
Foreign (U.K., Germany, France, Switzerland)		10		—		—
Total deferred income tax (provision) benefit		(4,361)		3,156		978
Total (provision) benefit for income taxes	$	(5,152)	$	2,047	$	214

A reconciliation of the Bermuda statutory income tax rate of 0% to the Company’s effective income tax rate is as follows:

	Years Ended
	December 31,
	2020		2019		2018
Bermuda statutory income tax rate	—	%	—	%	—	%
Foreign (U.S.) tax rate differential	(0.8)		(0.5)		(1.0)
Research and development tax credits	2.4		2.2		1.5
Share-based compensation	1.3		(0.5)		0.1
Permanent differences	(0.1)		(0.1)		—
Change in valuation allowance	(5.7)		(0.1)		—
U.S. state taxes, net of federal	0.1		(0.3)		(0.4)
FDII	0.6		0.9		—
Uncertain tax positions	(0.2)		(0.3)		—
Other	(0.9)		—		—
Effective income tax rate	(3.3)	%	1.3	%	0.2	%

Net deferred tax assets consisted of the following:

	December 31,
	2020		2019
Deferred tax assets:
Research and development tax credit carryforwards	$	1,674	$	238
Share-based compensation		6,271		3,746
Operating lease liability		1,764		712
Accrued bonus		1,208		855
Accrued expenses and other liabilities		634		223
Net operating losses		198		190
Total deferred tax assets		11,749		5,964
Valuation allowance		(9,307)		(330)
Deferred tax liabilities:
Depreciation and amortization		(786)		(745)
Right of use asset		(1,646)		(517)
Net deferred tax assets	$	10	$	4,372

As of December 31, 2020 and 2019, the Company had federal research and development tax credit carryforwards of approximately $1,383 and $228 respectively, available to reduce future tax liabilities, which begin to expire in 2040. As of December 31, 2020 and 2019, the Company had state research and development tax credit carryforwards of approximately $844 and $265 respectively, available to reduce future tax liabilities, which begin to expire in 2035.

As required by ASC 740, the Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. As a result of significant cumulative tax benefits associated with share-based compensation taxable events recognized in 2020, the Company has significant negative evidence in the form of cumulative losses and thus management has determined that it is more likely than not that the Company will not utilize the deferred tax assets in the United States. As such, the Company recorded a valuation allowance against its U.S. deferred tax assets at December 31, 2020 of $9,307. In prior years, the Company recorded a valuation allowance against certain state research and development tax credits only. In order to utilize state research and development tax credits, the Company will need taxable income in the jurisdiction of where the credit was generated. The Company currently has no taxable income in certain state jurisdictions and thus management had determined that it is more likely than not that the Company will not recognize the benefits of state research and development tax credits generated in those jurisdictions. A valuation allowance of $330 had been established at December 31, 2019.

Utilization of the state research and development tax credits may be subject to substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the shares of a corporation by more than 50% over a three-year period.

Changes in the valuation allowance for deferred tax were as follows:

	Years Ended
	December 31,
	2020		2019		2018
Valuation allowance at beginning of year	$	(330)	$	(49)	$	(27)
Increases recorded through the balance sheet		—		(200)		—
Increases recorded to income tax provision		(8,977)		(81)		(22)
Valuation allowance at end of year	$	(9,307)	$	(330)	$	(49)

The valuation allowance increased by $8,977 in 2020 primarily as a result of the recognition of a valuation allowance against all U.S. deferred tax assets.

The Company recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The amount of unrecognized tax benefits is $837 and $528 as of December 31, 2020 and 2019, respectively. The net increase relates to new tax positions on research and development credits generated in 2020, offset by positions which are no longer outstanding due to the statute of limitations closing.

A roll forward of the Company’s uncertainties in its income tax provision liability is presented below:

	Years Ended
	December 31,
	2020		2019		2018
Gross balance at the beginning of year	$	528	$	—	$	—
Gross increases based on current period tax positions		411		528		—
Gross decreases based on tax positions of the prior periods		(102)		—		—
Unrecognized tax benefits at the end of the year	$	837	$	528	$	—

The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. The Company had recorded immaterial interest on the tax positions during the year ended December 31, 2020, 2019 and 2018.

The Company files income tax returns in the United States as well as in certain state and in certain country jurisdictions. Kiniksa US’s federal and state income tax returns are subject to tax examinations for the tax years ended December 31, 2017 and subsequent years. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future period. There are currently no income tax examinations pending.