Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

13. Income Taxes

We are subject to U.S. federal, state and foreign corporate income taxes. Our loss before provision (benefit) for income taxes for the years ended December 31, 2022 and 2021 consisted of the following (in thousands):

	Year Ended December 31,
	2022			2021
Domestic	$	(1,885	)	$	206
Foreign		(68,300	)		(68,017	)
Total	$	(70,185	)	$	(67,811	)

Our provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2022		2021
Current:
Federal	$	1,059	$	114
State		86		23
Foreign		52		18
		1,197		155
Deferred:
Federal		76		(72	)
State		—		(15	)
Foreign		—		—
		76		(87	)
Total provision for income taxes	$	1,273	$	68

Reconciliation of Effective Tax Rate

Our effective tax rate for the years ended December 31, 2022 and 2021 is different from the statutory rate in the U.S. primarily due to the valuation allowance against deferred tax assets as a result of insufficient sources of income. The reconciliation of the statutory income tax rate to our effective income tax rate is as follows:

	Year Ended December 31,
	2022			2021
Income tax benefit at the statutory rate		21.0	%		21.0	%
Permanent differences		0.7			(6.5	)
Difference in tax rate		1.0			1.0
R&D Deduction		4.0			—
Change in valuation allowance		(27.4	)		(15.6	)
Other		(1.1	)		—
Total		(1.8	)%		(0.1	)%

Deferred Taxes

Deferred tax assets and liabilities represent future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities and for loss carryforwards using enacted tax rates expected to be in effect in the years in which the differences reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The principal components of the Company’s deferred tax assets consisted of the following (in thousands):

	December 31,
	2022			2021
Deferred tax assets:
Net operating loss carryforwards	$	31,338		$	14,693
Equity-based compensation expense		1,828			345
Accrued compensation		21			88
ROU Lease Liability		618			—
Capitalized R&D		1,231			—
Other		529			73
Total deferred tax assets	$	35,565		$	15,199
Valuation allowance		(34,984	)		(15,112	)
Net deferred tax assets	$	581		$	87
ROU Lease Asset		567			—
Other Liabilities		14			—
Total deferred tax liabilities		581			—
Net deferred tax asset (liability)	$	—		$	87

In 2017, the U.S. enacted the Tax Cuts and Jobs Act (the 2017 Tax Act), which contained a provision that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022. Previously, these expenses could be deducted in the year incurred. The implementation of this provision increased our deferred tax asset and valuation allowance by approximately $1.2 million in 2022.

We determine whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, none of the benefit attributable to the position is recognized. The tax benefit to be recognized for any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50%.

When realization of a deferred tax asset is more likely than not to occur, the benefit related to the deductible temporary differences attributable to operations is recognized as a reduction of income tax expense. Valuation allowances are provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. We cannot be certain that future income in Denmark will be sufficient to realize the Company’s deferred tax assets. Accordingly, a full valuation allowance has been provided against our net deferred tax assets in Denmark. We have also provided a full valuation allowance against our net deferred tax assets in the U.S. for IO Bio US, Inc. The Company's valuation allowance increased by $19.9 million in 2022. The increase in 2022 is primarily the result of an increase in net operating loss carryforwards (NOL carryforwards) in Denmark.

Available Carryforward Tax Losses

As of December 31, 2022, we had NOL carryforwards of approximately $140.5 million that can be carried forward indefinitely according to Danish Tax Authority regulations.

Uncertain Tax Positions

We determine our uncertain tax positions based on whether and how much of a tax benefit taken by us in our tax filings is more likely than not to be sustained upon examination by the relevant income tax authorities. We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by the Danish Tax Authority. As of December 31, 2022 and 2021, we have not recorded an uncertain tax position liability.

Tax filings in Denmark remain subject to examination by the Danish Tax Authority. As of December 31, 2022, tax years 2019 and forward were generally open to examination by the Danish Tax Authority.

Other Tax Matters

The Company recognizes accrued interest related to unrecognized tax benefits and penalties as income tax expense. The Company does not have any material unrecognized tax benefits which would affect the effective tax rate, if recognized. The Company does not have any unrecognized tax benefits which would reverse within the next twelve months.

The Company is eligible for the Danish enhanced research and development tax allowance, providing for an increase in the deductible value of the amount of certain R&D expenditures. For 2019, the deduction is set at 101.5%. Furthermore, the deduction for R&D expenditures is set at 130% for 2020 through 2022, 108% for 2023 through 2025, and 110% for 2026.

The tax allowance is reported as a reduction to research and development expense in the statements of operations. For the years ended December 31, 2022 and 2021, we applied for refundable tax credit of 25 million DKK for each year and a receivable was recorded for $0.8 million, respectively.