10. Income Taxes

The Tax Reform Act of 1986 contains provisions that limit the amount of net operating loss carryforwards (“NOLs”) and tax credit carryforwards that companies may utilize in any one year in the event of cumulative changes in ownership over a three-year period in excess of 50%. The Company has completed several financings since the effective date of the Tax Reform Act of 1986, which as of December 31, 2016, have resulted in ownership changes in excess of 50% that will significantly limit the Company’s ability to utilize its NOL and tax credit carryforwards. In December, 2014, the Company completed a study which determined that a cumulative three-year ownership change in excess of 50% had occurred in November 2012. The 2016 and 2015 federal and state NOLs, tax credit carryforwards and related deferred tax assets shown below have been adjusted to reflect the ownership change limitations that resulted from this study. The Company has entered into additional equity transactions since November 2012 that could result in ownership changes that further limit its ability to utilize its NOL and tax credit carryforwards. The Company has not determined whether any additional ownership change limitations have resulted from equity transactions that have occurred after November 2012.

As of December 31, 2016, the Company had cumulative federal and state NOLs of approximately $149.3 million and $138.2 million available to reduce federal and state taxable income, respectively. These NOLs expire through 2036. In addition, at December 31, 2016, the Company had cumulative federal and state tax credit carryforwards of $8.4 million and $1.6 million, respectively, available to reduce federal and state income taxes, respectively, which expire through 2036 and 2031, respectively. The federal and state NOLs include approximately $1.0 million and $0.7 million, respectively, of deductions related to the exercise of stock options subsequent to the adoption of ASC 718, “Stock Compensation.” These amounts represent excess tax benefits as defined under ASC 718 and have not been included in the gross deferred tax asset reflected for NOLs. However, the Company intends to adopt ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, during the quarter ended March 31, 2017. As a result of the adoption, it is anticipated that the net operating losses deferred tax assets will increase by $1.4 million and will be offset by a corresponding increase in the valuation allowance. The Company does not anticipate that the adoption of ASU 2016-09 will have an impact on the Company’s Financial statements.

As of December 31, 2016 and 2015, the components of the deferred tax assets are approximately as follows:


	2016		2015
	(In thousands)
Operating loss carryforwards	$	56,832	$	46,432
Tax credit carryforwards		9,428		5,627
Other		7,710		5,698
		73,970		57,757
Valuation allowance		(73,970)		(57,757)
	$	—	$	—

The Company has provided a valuation allowance for its deferred tax asset due to the uncertainty surrounding the ability to realize this asset.

The difference between the 34% U.S. federal corporate tax rate and the Company’s effective tax rate is as follows for the years ended December 31, 2016, 2015 and 2014:


	2016		2015		2014
Expected federal income tax rate	(34.0)	%	(34.0)	%	(34.0)	%
Expiring credits and NOLs	—		—		—
Change in valuation allowance	42.2		39.8		(115.3)
Federal and state credits	(9.9)		(7.4)		(4.0)
State income taxes, net of federal benefit	(3.7)		(4.5)		(5.1)
Permanent differences	3.5		2.4		0.8
Section 382 limitation	—		—		157.5
Other	1.9		3.7		0.1
Effective tax rate	0.0	%	0.0	%	0.0	%

The Company applies ASC 740-10, “Accounting for Uncertainty in Income Taxes, an interpretation of ASC 740.” ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The Company had no unrecognized tax benefits resulting from uncertain tax positions at December 31, 2016 and 2015.

The Company has not, as of yet, conducted a study of its research and development credit carryforwards. Such a study might result in an adjustment to the Company’s research and development credit carryforwards, however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under ASC 740-10. A full valuation allowance has been provided against the Company’s research and development credits 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 statements of operations and comprehensive loss if an adjustment was required.

The Company files income tax returns in the U.S. federal and Massachusetts jurisdictions. The Company is no longer subject to tax examinations for years before 2013, except to the extent that it utilizes NOLs or tax credit carryforwards that originated before 2013. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company has not incurred any interest or penalties. In the event that the Company is assessed interest or penalties at some point in the future, they will be classified in the Statement of Operations and comprehensive loss as general and administrative expense.

In November 2015, the FASB released ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 requires that all deferred income tax assets, liabilities and valuation allowances applicable to the same taxing jurisdiction be presented as noncurrent in a classified statement of financial position. ASU No. 2015-17 permits early application on a prospective or retrospective basis. The Company elected to early adopt ASU No. 2015-17 on a prospective basis in its 2015 financial statements because this change in accounting principal will allow the Company to benefit from the simplified presentation of deferred income taxes. Prior period financial statements have not been retrospectively adjusted to reflect the adoption of ASU No. 2015-17.