Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

(11)Income Taxes

During the fourth quarter of 2023, Cullinan recorded a current income tax benefit of $14.1 million. The income tax benefit recorded for 2023 was driven by return to provision adjustments for the utilization of 2022 and historical tax attributes against the gain on sale of Cullinan Pearl and the expected utilization of federal research and development credits generated during 2023 that can be carried back to 2022. During 2022, the Company recorded a current income tax expense of $42.1 million. The income tax expense recorded for 2022 was driven by the tax from the gain on sale of Cullinan Pearl, partially offset by the expected utilization of tax attributes generated during 2022 and the release of valuation allowance for the expected utilization of certain historical tax attributes against the gain from the sale. Refer to Note 3 for additional details on the sale of Cullinan Pearl. The Company’s net income (loss) before income taxes consists solely of domestic income and losses in each of 2023 and 2022. As of December 31, 2023, Cullinan had recorded $5.4 million within prepaid expenses and other current assets on its consolidated balance sheets, which was comprised of $3.9 million for 2022 state tax refund claims and $1.5 million for the expected carryback of 2023 federal research and development credits, partially offset by a refund payment from the Internal Revenue Service (the "IRS") that was in excess of the Company’s 2022 federal refund claim.

A reconciliation of the Company’s statutory income tax rate to its effective income tax rate in 2023 and 2022 is as follows:

	2023			2022
Federal statutory rate		21.00	%		21.00	%
State taxes, net of federal benefit		6.70	%		4.71	%
Research and development credits		6.28	%		(0.25	)%
Equity-based compensation		(1.49	)%		0.77	%
Valuation allowance		(24.41	)%		1.13	%
Other, net		0.27	%		0.45	%
Effective tax rate		8.35	%		27.81	%

As of December 31, 2023 and 2022, the net deferred income tax asset balance related to the following (in thousands):

	December 31,
	2023			2022
Deferred tax assets:
Capitalized research and development	$	41,901		$	18,724
Equity-based compensation		16,960			12,087
Net operating loss		14,443			10,531
Licenses		7,189			461
Research and development credit		3,155			1,110
Accrued expenses		1,836			1,977
Basis difference on gain on sale of Cullinan Pearl		1,700			1,805
Lease liability		985			1,345
Capitalized organizational and start-up expenses		116			127
Gross deferred tax assets		88,285			48,167
Valuation allowance		(87,371	)		(46,766	)
Net deferred tax asset		914			1,401
Deferred tax liability
ROU asset		697			1,108
Depreciation and amortization		217			293
Net deferred tax asset	$	—		$	—

The Company's net operating loss ("NOL") and tax credit carryforwards are subject to review and possible adjustment by the IRS and state tax authorities. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions, NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company and any change in ownership arising from new issuances of stock by the company.

As of December 31, 2023 and 2022, the Company had federal NOL carryforwards, of $54.3 million and $42.6 million, respectively, which may be available to offset future income tax liabilities. As of December 31, 2023, $52.9 million of Cullinan's federal NOL carryforwards can be carried forward indefinitely, and the remaining $1.4 million expires in 2037. As of December 31, 2023 and 2022, the Company had state NOL carryforwards of $56.8 million and $27.1 million, respectively, which may be available to offset future income tax liabilities. As of December 31, 2023, Cullinan's state NOL carryforwards begin to expire in 2031.

As of December 31, 2023 and 2022, the Company had federal research and development tax credit carryforwards of $1.6 million and $0.9 million, respectively. As of December 31, 2023, Cullinan’s federal research and development tax credit carryforwards begin to expire in 2036. As of December 31, 2023 and 2022, the Company had state research and development tax credit carryforwards of $2.0 million and $0.3 million, respectively. As of December 31, 2023, $0.3 million of Cullinan's state research and development tax credit carryforwards can be carried forward indefinitely, and the remaining $1.7 million expires beginning in 2036.

Cullinan has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which primarily consist of capitalized research and development costs, temporary differences on equity-based compensation, and NOL carryforwards. The Company has considered its history of cumulative net losses, with the exception of the one-time gain on the sale of Cullinan Pearl in 2022, estimated future taxable income and prudent and feasible tax planning strategies and has concluded that it is more likely than not that Cullinan will not realize the benefits of its deferred tax assets. As a result, as of December 31, 2023, the Company has maintained a full valuation allowance against its remaining net deferred tax assets.

Cullinan’s valuation allowance increased during 2023 and 2022 primarily due to capitalized research and development costs and the generation of NOLs as follows (in thousands):

	2023			2022
Valuation allowance at beginning of year	$	46,766		$	44,552
Increases recorded to income tax provision		41,307			1,712
Increases (decreases) recorded to equity		(702	)		502
Valuation allowance at end of year	$	87,371		$	46,766

The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the states in which Cullinan operates or does business in.

The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. Cullinan records uncertain tax positions as liabilities and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2023 and 2022, Cullinan has not recorded a liability for any uncertain tax positions in its consolidated financial statements.

The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statements of operations and comprehensive income (loss). As of December 31, 2023 and 2022, no accrued interest or penalties are included in the consolidated balance sheets.

Cullinan files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions in the U.S. There are currently no pending tax examinations. Cullinan's federal and state income tax returns are generally subject to tax examinations for tax years 2016 and later. To the extent that the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the IRS and the state tax authorities to the extent utilized in a future period.