Note 14. Income Taxes

In December 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. Among other things, the TCJA permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, GAAP required companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a provision of $27.6 million to income tax expense and a corresponding reduction in the valuation allowance for the year ended December 31, 2017. As a result, there was no impact to the Company’s statement of operations and comprehensive loss for the year ended December 31, 2017 as a result of reduction in tax rates.

The Company’s preliminary estimate of the TCJA and the remeasurement of its deferred tax assets and liabilities was subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of the Company’s tax returns. The final determination of the TCJA and the remeasurement of the Company’s deferred assets and liabilities was completed during 2018, within one year from the enactment of the TCJA, as additional information became available. There were no changes to management’s analysis of the effects of TCJA originally performed as of December 31, 2017.

Certain provisions from the Tax Reform Act of 1986 were not impacted by TCJA, such as those limiting the amount of net operating loss carryforwards (“NOLs”) and tax credit carryforwards that companies may utilize in any one year in the event of changes in ownership, as defined by Section 382 of the Internal Revenue Code. The Company has completed several financings since the effective date of the Tax Reform Act of 1986, which as of December 31, 2019, have resulted in ownership changes that will significantly limit the Company’s ability to utilize its net operating loss and tax credit carryforwards. In December 2017, the Company completed a study which determined that ownership changes had occurred. The federal and state net operating loss and tax credit carryforwards and related deferred tax assets shown in the table below have been adjusted to reflect the limitations that resulted from this study. The Company continues to monitor equity activity and potential ownership changes.

As of December 31, 2019, the Company had cumulative federal and state NOLs of approximately $295.8 million and $290.2 million available to reduce federal and state taxable income, respectively. As a result of TCJA, federal net operating losses incurred for taxable years beginning after January 1, 2018 have an unlimited carryforward period, but can only be utilized to offset 80% of taxable income in future taxable periods. Of the $295.8 million of federal NOLs, $98.4 million have an unlimited carryforward and the remaining NOLs are still subject to expiration through 2037. State NOLs are still subject to expiration according to the laws of each respective jurisdiction. The Company files state tax returns in Massachusetts and Pennsylvania whereby both jurisdictions impose a 20-year carryforward period. All $290.2 million of state NOLs expire through 2039, with the first year of expiration being 2032 for $21.0 million of Massachusetts NOLs. In addition, at December 31, 2019, the Company had cumulative federal and state tax credit carryforwards of $21.6 million and $1.9 million, respectively, available to reduce federal and state income taxes, respectively, which expire through 2039 and 2034, respectively, for federal and state purposes.

As of December 31, 2019 and 2018, the components of the deferred tax assets are approximately as follows:


	2019		2018
	(In thousands)
Operating loss carryforwards	$	81,403	$	70,509
Tax credit carryforwards		23,072		18,514
Lease liabilities		308		—
Other		7,994		8,627
Total deferred tax assets		112,777		97,650
Right-of-use asset		(306)		—
Valuation allowance		(112,471)		(97,650)
Net deferred tax assets	$	—	$	—

Note 14. Income Taxes (Continued)

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

The difference between the U.S. federal corporate tax rate and the Company’s effective tax rate for the years ended December 31, 2019, 2018 and 2017 is as follows:


	2019		2018		2017
Expected federal income tax rate	(21.0)	%	(21.0)	%	(34.0)	%
Expiring credits and NOLs	—		1.0		—
Change in valuation allowance	26.2		37.9		0.9
Federal and state credits	(8.1)		(7.4)		(6.9)
State income taxes, net of federal benefit	(4.7)		(9.7)		(3.7)
Permanent differences	4.8		0.5		2.4
Rate change related to TCJA	—		—		41.9
Other	2.8		(1.3)		(0.6)
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, 2019 and 2018.

The Company has not conducted a study of its research and development tax 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, Massachusetts and Pennsylvania jurisdictions. The Company is no longer subject to tax examinations for years before 2016, except to the extent that it utilizes NOLs or tax credit carryforwards that originated before 2016. 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 statements of operations and comprehensive loss as general and administrative expense.