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Income Taxes
12 Months Ended
Dec. 31, 2017
Income Taxes [Abstract]  
Income Taxes
5. Income Taxes

Loss before income tax (benefit) expense is comprised of (in thousands):

 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
United States
 
$
(11,802
)
 
$
(83,622
)
 
$
(87,906
)
Foreign
  
(11,474
)
  
   
 
Loss before income tax (benefit) expense
 
$
(23,276
)
 
$
(83,622
)
 
$
(87,906
)


Our income tax (benefit) expense was as follows (in thousands):

  
Years Ended December 31,
 
  
2017
  
2016
  
2015
 
Current:
         
Federal
 
$
(7,460
)
 
$
1,067
  
$
379
 
State
  
1,246
   
1,867
   
(7
)
Foreign
  
234
   
   
 
Total current income tax (benefit) expense
  
(5,980
)
  
2,934
   
372
 
             
Deferred:
            
Federal
  
   
   
 
State
  
   
   
 
Total deferred income tax (benefit) expense
  
   
   
 
Total income tax (benefit) expense
 
$
(5,980
)
 
$
2,934
  
$
372
 


The reconciliation between our effective tax rate on loss from continuing operations and the statutory U.S. tax rate is as follows (in thousands):

  
Years Ended December 31,
 
  
2017
  
2016
  
2015
 
Pre-tax loss
 
$
(23,276
)
    
$
(83,622
)
    
$
(87,906
)
   
                      
Statutory rate
  
(8,147
)
  
35.0
%
  
(29,268
)
  
35.0
%
  
(30,767
)
  
35.0
%
State income tax net of federal benefit
  
722
   
(3.1
)%
  
(276
)
  
0.3
%
  
1
   
0.0
%
Foreign
  
4,299
   
(18.3
)%
  
   
0.0
%
  
   
0.0
%
Net change in valuation allowance
  
(76,409
)
  
328.3
%
  
55,927
   
(66.9
)%
  
69,499
   
(79.1
)%
Net operating loss expiration
  
3,987
   
(17.0
)%
  
   
0.0
%
  
   
0.0
%
Tax credits
  
(32,769
)
  
140.8
%
  
(26,954
)
  
32.2
%
  
(41,284
)
  
47.0
%
Deferred tax true-up
  
4,848
   
(20.6
)%
  
2,591
   
(3.1
)%
  
1,496
   
(1.7
)%
Tax Cuts and Jobs Act
  
107,323
   
(461.1
)%
  
       
   
0.0
%
Nondeductible items
  
4,123
   
(17.9
)%
  
1,149
   
(1.4
)%
  
1,055
   
(1.2
)%
Akcea deconsolidation adjustment at IPO
  
469
   
(2.0
)%
  
   
0.0
%
  
   
0.0
%
Excess stock-based compensation
  
(14,337
)
  
61.0
%
  
   
0.0
%
  
   
0.0
%
Other
  
(89
)
  
0.6
%
  
(235
)
  
0.4
%
  
372
   
(0.4
)%
Effective rate
 
$
(5,980
)
  
25.7
%
 
$
2,934
   
(3.5
)%
 
$
372
   
(0.4
)%

Significant components of our deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):

  
Years Ended December 31,
 
  
2017
  
2016
 
Deferred Tax Assets:
      
Net operating loss carryovers
 
$
153,575
  
$
194,372
 
R&D credits
  
240,290
   
193,845
 
Deferred revenue
  
42,055
   
54,203
 
Stock-based compensation
  
40,090
   
48,209
 
Intangible and capital assets
  
672
   
 
Other
  
12,164
   
26,228
 
Total deferred tax assets
 
$
488,846
  
$
516,857
 
         
Deferred Tax Liabilities:
        
Convertible debt
 
$
(32,391
)
 
$
(62,669
)
Intangible and capital assets
  
   
(2,030
)
Net deferred tax asset
 
$
456,455
  
$
452,158
 
Valuation allowance
  
(456,455
)
  
(452,158
)
         
Total net deferred tax assets and liabilities
 
$
  
$
 

In accordance with the SEC guidance, we provided our best estimate of the impact of the Tax Act in the period ended December 31, 2017 based on our understanding of the Tax Act and guidance available as of the date of this filing. We remeasured our existing net U.S. deferred tax assets using the enacted rate and other known existing changes to the tax code. This resulted in a total decrease in these assets by $107.3 million which was fully offset by a decrease in the valuation allowance. In addition, we recorded a $7.7 million tax benefit related to our cumulative prior year AMT tax credit carryovers, which are now reflected as part of a long-term income tax receivable because under the Tax Act, AMT credits are refundable from 2018 through 2021.We also assessed the impact of the deemed repatriation of foreign earnings and the impact of the limitation on tax deductions for executive compensation under the applicable section of the tax code. We have recognized provisional amounts in our financial statements for these and other items. The ultimate impact may differ materially from these provisional amounts due to, among other things, additional analysis, changes in our interpretations and assumptions, additional regulatory guidance that may be issued, and other actions we may take as a result of the Tax Act.

At December 31, 2017, we had federal and California tax net operating loss carryforwards of approximately $561.1 million and $887.1 million, respectively. Our federal tax loss carryforwards will begin to expire in 2024, unless we use them before then. Our California loss carryforwards continued to expire in 2017. At December 31, 2017 we also had federal and California research and development tax credit carryforwards of approximately $233.3 million and $56.2 million, respectively. Our Federal research and development tax credit carryforwards begin to expire in 2018. Our California research and development tax credit carryforwards are available indefinitely.

Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

We record a valuation allowance to reduce the balance of our net deferred tax assets to the amount we believe is more-likely-than-not to be realized. We have incurred historical financial statement losses since inception and as a result we have a full valuation allowance recorded against our net deferred tax assets. We regularly assess the future realization of our net deferred tax assets and will reduce the valuation allowance in any such period in which we determine that all, or a portion, of our deferred tax assets are more-likely-than-not to be realized.

Our valuation allowance increased by $4.3 million from December 31, 2016 to December 31, 2017. The net increase relates to increases from current year activity, offset by a decrease related to the remeasurement of our net deferred tax assets as required by the Tax Act.

Historically, we recognized excess tax benefits associated with stock-based compensation to stockholders' equity only when realized. We followed the with-and-without approach excluding any indirect effects of the excess tax deductions to determine when we should realize excess tax benefits relating to stock-based compensation. Under this approach, we did not realize our excess tax benefits related to stock-based compensation until after we utilize all our other tax benefits available to us. During the year ended December 31, 2016, we realized $1.9 million of such excess tax benefits, and accordingly, we recorded a corresponding credit to additional paid-in capital.

In March 2016, the FASB issued amended guidance to simplify certain aspects of accounting for stock-based payments. We adopted this amended guidance on January 1, 2017. Under the amended guidance, we recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the period in which they occur.

We analyze filing positions in all U.S. federal, state and foreign jurisdictions where we file income tax returns, and all open tax years in these jurisdictions to determine if we have any uncertain tax positions on any of our income tax returns. We recognize the impact of an uncertain tax position on an income tax return at the largest amount that the relevant taxing authority is more-likely-than not to sustain upon audit. We do not recognize uncertain income tax positions if they have less than 50 percent likelihood of the applicable tax authority sustaining our position.

The following table summarizes our gross unrecognized tax benefits (in thousands):

  
Years Ended December 31,
 
  
2017
  
2016
  
2015
 
Beginning balance of unrecognized tax benefits
 
$
66,999
  
$
51,257
  
$
27,365
 
Settlement of prior period tax positions
  
   
(4,033
)
  
 
Increase for prior period tax positions
  
1,520
   
7,928
   
215
 
Increase for current period tax positions
  
9,495
   
11,847
   
23,677
 
Ending balance of unrecognized tax benefits
 
$
78,014
  
$
66,999
  
$
51,257
 

Included in the balance of unrecognized tax benefits at December 31, 2017, is $63.6 million that could impact our effective tax rate, if recognized. None of the unrecognized tax benefits currently impact our effective tax rate due to the full valuation allowance we have recorded against our deferred tax assets.

We do not foresee any material changes to our gross unrecognized tax benefits within the next twelve months.

We recognize interest and/or penalties related to income tax matters in income tax expense. We did not recognize any accrued interest and penalties related to gross unrecognized tax benefits during the year ended December 31, 2017.

Due to the carryforward of unutilized net operating losses and research and development credits, we are subject to taxation in the United States and various state jurisdictions. Our tax years for 1998 through 2016 are subject to examination by the U.S. tax authorities and our tax years for 2003 through 2016 are subject to examination by the California tax authorities.

We do not provide for a U.S. income tax liability and foreign withholding taxes on undistributed foreign earnings of our foreign subsidiaries.