Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 9. Income taxes

For financial reporting purposes, income (loss) before income tax expense (benefit) for the years ended December 31, 2021 and 2020 consisted of the following:

(in thousands)	2021			2020
Domestic	$	(47,242	)	$	(31,184	)
Foreign		303,706			(6,906	)
Income (loss) before income tax expense (benefit)	$	256,464		$	(38,090	)

The Company’s worldwide effective tax rate for the years ended December 31, 2021 and 2020 was 16.4% and 0.2%, respectively. The reconciliation of the statutory U.S. federal income tax rate (21%) to the effective income tax rate is as follows:

		2021					2020
U.S. statutory federal income tax rate		21.0	%				21.0	%
State income taxes	(0.5)			4.8
Foreign tax differential	4.7			0.8
Non-deductible/non-taxable permanent differences	0.1			3.4
Innovation income deduction tax exemption	(28.2)					—
Net GILTI Inclusion Income	15.2					—
Change in local tax rate		—			(8.6)
Unrecognized tax benefits	6.6					—
Other	(1.1)			0.9
Change in valuation allowance	(1.4)			(22.1)
Effective income tax rate		16.4	%		0.2%

The components of income tax expense (benefit) for the years ended December 31, 2021 and 2020 consisted of the following:

(in thousands)	2021		2020
Current
Domestic	$	41,535	$	(60	)
Foreign		408		3
Deferred		—		—
Total income tax expense (benefit)	$	41,943	$	(57	)

Deferred income taxes reflected the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating losses and tax credit carryforwards. The significant components of the Company’s deferred tax assets and liabilities are comprised of the following:

	December 31,
(in thousands)	2021			2020
Deferred tax assets :
Net operating loss carryforward	$	17,097		$	25,206
Foreign research and development expenses		7,884			6,219
Stock-based compensation		1,784			758
Operating lease liabilities		1,374			—
Accrued bonus		390			—
Other		17			313
Total deferred tax assets		28,546			32,496
Valuation allowance		(26,647	)		(32,029	)
Deferred tax assets, net of valuation allowance		1,899			467
Deferred tax liabilities:
Operating lease right of use assets		(1,371	)		—
Prepaid expenses		(497	)		(445	)
Depreciation and amortization		(31	)		(22	)
Total deferred tax liabilities		(1,899	)		(467	)
Deferred tax assets and liabilities, net of valuation    allowance	$	—		$	—

The Company has evaluated the positive and negative evidence bearing upon its ability to realize its deferred tax assets. Management has considered the Company’s history of losses in prior years, the nature of the Company’s deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible and has concluded that it is more likely

than not that the company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation will be maintained on the net deferred tax assets until there is sufficient evidence to support the reversal of some portion of these allowances. The valuation allowance decreased $5.4 million during the year ended December 31, 2021 primarily due to the utilization of federal net operating loss (“NOL”) carryforwards in the U.S., which was partially offset by an increase in cumulative temporary differences related to stock based compensation and foreign research and development expenses.

The Tax Cuts and Jobs Act, or TCJA, which was enacted in December 2017, will generally allow federal losses generated after 2017 to be carried over indefinitely, but will generally limit the NOL deduction to the lesser of the NOL carryover or 80% of a corporation’s taxable income (subject to Section 382 of the Internal Revenue Code of 1986, as amended). In addition, there will be no carryback for losses generated after 2017. Losses generated prior to 2018 will generally be deductible to the extent of the lesser of a corporation’s NOL carryover or 100% of a corporation’s taxable income and be available for twenty years from the period the loss was generated. The Company does not have any NOLs generated prior to 2018. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act temporarily allows the Company to carryback NOLs arising in 2018, 2019 and 2020 to the five prior tax years. In addition, NOLs generated in these years could fully offset prior year taxable income without the 80% of the taxable income limitation under the TCJA which was enacted on December 22, 2017. The Company filed a U.S. NOL carryback claim to carryback a portion of its U.S. 2020 NOL to offset income generated in the tax years ended December 31, 2018 and 2019, which resulted in a minimal tax refund of less than $0.1 million.

As of December 31, 2021, the Company has Belgium net operating loss carryforwards for Belgian federal income tax purposes of approximately $56.3 million, that can be carried forward indefinitely.

As of December 31, 2021, the Company has fully utilized its U.S. federal NOL carryforwards and has $52.0 million of state NOL carryforwards, which may be available to offset future state income tax liabilities. They expire at various dates through 2041. As of December 31, 2021, the Company has de minimis U.S. federal and state tax credit carryforwards available to reduce future tax labilities, which expire at various dates through 2041 and 2036, respectively.

Utilization of net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating losses that can be utilized annually to offset future taxable income. The Company has completed several financings since its inception, which may result in a change of control as defined in Section 382 or could result in a change in control in the future. The Company has not yet completed a study to assess whether a change of ownership has occurred, or whether there have been multiple ownership changes since its formation. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development credit carryforwards before utilization.

The Company has not, as of yet, conducted a study of research and development credit carryforward in the U.S. Such a study, once undertaken by the Company, may result in an adjustment to the Company’s U.S. research and development credit carryforward. A full valuation allowance has been provided against the U.S. research and development credit carryforward and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the Company’s balance sheet or statement of operations if an adjustment is required.

The Company files income tax returns in the U.S., Indiana, New Hampshire, Massachusetts and Belgium. The Company is subject to U.S. federal, state and Belgium tax examinations by tax authorities for years 2018 through present. To the extent that the Company has tax attribute carryforwards, the tax years in which the attributes were generated may still be adjusted upon examination by the Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period.

Unrecognized tax benefits were $17.0 million and zero as of December 31, 2021 and 2020, respectively. iTeos Belgium is currently under examination by taxing authorities in that country. Their latest assessment of $0.4 million of additional taxes owed has been included in income tax expense in the 2021 statement of operations and other comprehensive income (loss).

There was no accrual for uncertain tax positions or for interest and penalties related to uncertain tax positions for 2020. The changes to the unrecognized tax benefits during the year ended December 31, 2021 were as follows:

(in thousands)
Balance at December 31, 2020	$	—
Increase related to current year tax positions		17,000
Balance at December 31, 2021	$	17,000