Subsequent to the Merger, the Company is organized as a Delaware corporation, treated as a c-corporation for federal and state income taxes. Its wholly-owned subsidiaries are included in the consolidated corporate tax return. The Company has net operating losses, therefore does not have any current tax liability for the period after the Merger. The Company’s wholly-owned subsidiary, Compass Therapeutics Advisors Inc., was subject to federal and state income taxes prior to the Merger. Current income tax expense for the years ended December 31, 2020 and 2019 reflects pre-Merger activity.

	Year Ended December 31,
	2020		2019
Current	(000's)
Federal	$	22	$	61
State		10		30
Total	$	32	$	91

Deferred
Federal	$	—	$	—
State		—		—
Total income tax expense	$	32	$	91

The effective tax rate of our provision for income taxes differs from the federal statutory rate for the periods presented as follows:

	December 31,
	2020			2019
Statutory rate		21.0	%		21.0	%
Income not subject to federal corporate income tax		-8.0	%		-22.9	%
State taxes		6.4	%		6.3	%
Nondeductible expenses		-0.5	%		-0.1	%
Change in valuation allowance		-19.0	%		-4.6	%
Total		-0.1	%		-0.3	%

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and the overall prospects of our business. Based upon management’s assessment of all available evidence, the Company believes that it is more-likely-than-not that the deferred tax assets will not be realizable, and therefore, a valuation allowance has been established. The valuation allowance for deferred tax assets was approximately $6.6 million and $1.5 million as of December 31, 2020 and 2019, respectively.

As of December 31, 2020, the Company has U.S. net operating loss carryforwards (“NOLs”) of approximately $14.4 million and research and development credit carryforwards (“R&D credits”) of approximately $2.0 million. For income tax purposes, these NOLs and R&D credits will expire in various amounts through 2030. NOLs generated after 2017 do not expire. The Tax Reform Act of 1986 contains provisions which limit the ability to utilize net operating loss carryforwards and R&D credit carryforwards in the case of certain events including significant changes in ownership interests. The Merger may have resulted in a “change in ownership” as defined by IRC Section 382 of the Internal Revenue Code of 1986, as amended. Accordingly, a substantial portion of the R&D Credit carryforwards may be subject to annual limitations in reducing any future year’s tax. The Company did not generate any NOLs until after the Merger therefore these limitations do not apply.

	December 31,
	2020			2019
Deferred tax assets	(000's)
Net operating loss carryforwards	$	3,938		$	—
Research and development credits		2,038			1,511
Noncash compensation		609			—
Other		50			—
Deferred tax asset		6,635			1,511

Less valuation allowance		(6,635	)		(1,511	)
Net deferred tax assets	$	—		$	—