G. Income Taxes

The difference between the Company’s expected tax benefit, as computed by applying the U.S. federal corporate tax rate of 34% to loss before the benefit for income taxes, and actual tax is reconciled in the following chart (in thousands):


	Year Ended June 30,
	2016		2015		2014
Loss before income tax expense	$	(144,817)	$	(60,739)	$	(71,364)
Expected tax benefit at 34%	$	(49,238)	$	(20,651)	$	(24,264)
Permanent differences		345		818		215
Incentive stock options		2,501		1,948		1,738
State tax benefit net of federal benefit		(7,954)		(3,252)		(4,062)
Increase in valuation allowance, net		62,505		27,940		26,011
Federal research credit		(4,109)		(1,407)		(1,002)
Federal orphan drug credit		(4,241)		(5,471)		—
Expired loss and credit carryforwards		184		75		1,364
Other		7		—		—
Benefit for income taxes	$	—	$	—	$	—

At June 30, 2016, the Company has net operating loss, or NOL, carryforwards of approximately $377.9 million available to reduce federal taxable income, if any, that expire in 2028 through 2036 and $214.0 million available to reduce state taxable income, if any, that expire in fiscal 2033 through fiscal 2036. Included in the federal and state carryforwards is $27.0 million and $20.5 million, respectively, related to deductions from the exercise of stock options and the related tax benefit which will result in an increase in additional paid‑in capital if and when realized through a reduction of taxes paid in cash. The Company also has federal and state credit carryforwards of approximately $40.4 million available to offset federal and state income taxes, which expire beginning in 2017. Due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, the Company has established a valuation allowance to fully reserve these tax benefits.

Deferred income taxes reflect 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. Significant components of the Company’s deferred tax assets and liabilities as of June 30, 2016 and 2015 are as follows (in thousands):


	June 30,
	2016		2015
Deferred tax assets:
Net operating loss carryforwards	$	139,791	$	89,362
Research and development tax credit carryforwards		36,879		25,131
Property and other intangible assets		2,395		2,532
Deferred revenue		12,911		16,179
Stock-based compensation		16,033		11,379
Deferred lease incentive		4,356		4,279
Other liabilities		3,726		3,177
Royalty sale		75,956		78,427
Total deferred tax assets	$	292,047	$	230,466

Deferred tax liabilities:
Accounting method change		(492)		(983)
Royalty sale transaction costs		(1,757)		(2,190)
Total deferred tax liabilities	$	(2,249)	$	(3,173)
Valuation allowance		(289,798)		(227,293)
Net deferred tax assets/(liabilities)	$	—	$	—

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As required by the provisions of ASC 740, the Company has determined that it is not more-likely-than-not that the tax benefits related to the federal and state deferred tax assets will be realized for financial reporting purposes. Accordingly, the deferred tax assets have been fully reserved at June 30, 2016 and 2015. The valuation allowance increased by $62.5 million during 2016 due primarily to additional net loss incurred during the year and additional research and development tax credits earned during the year, partially offset by the expiration of net operating loss carryforwards.

Utilization of the NOL and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future as provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three‑year period. Since the Company’s formation, it has raised capital through the issuance of capital stock on several occasions (both pre and post initial public offering) which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. During fiscal year 2015, the Company completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since its formation and determined no ownership change occurred under Section 382. The study has not been updated for fiscal year 2016. Additionally, the Company has not completed a Research and Development Credit Study; accordingly, it is probable that a portion of the tax credit carryforward may not be available to offset future income.

The Company accounts for uncertain tax positions under the recognition and measurement criteria of ASC 740-10. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. If the Company does not believe that it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized. As of June 30, 2016 and 2015, no uncertain tax positions have been recorded. Interest and penalties related to the settlement of uncertain tax positions, if any, will be reflected in income tax expense. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying consolidated financial statements. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date. Due to existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact our effective tax rate.

The statute of limitations for assessment by the Internal Revenue Service, or IRS, and state tax authorities is open for tax years ending June 30, 2013, 2014, 2015 and 2016, although carryforward attributes that were generated prior to fiscal year 2013 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period.