Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes [Abstract]

Income Taxes

5. Income Taxes

Income (loss) before income taxes is comprised of (in thousands):

	Year Ended December 31,
	2020			2019		2018
United States	$	(172,702	)	$	344,280	$	(69,576	)
Foreign		2,670			2,489		(6,580	)
Income (loss) before income taxes	$	(170,032	)	$	346,769	$	(76,156	)

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

	Year Ended December 31,
	2020			2019			2018
Current:
Federal	$	(837	)	$	35,861		$	438
State		3,782			14,329			(1,442	)
Foreign		518			413			374
Total current income tax expense (benefit)		3,463			50,603			(630	)
Deferred:
Federal		313,271			(7,096	)		(290,511	)
State		—			—			—
Total deferred income tax benefit		313,271			(7,096	)		(290,511	)
Total income tax expense (benefit)	$	316,734		$	43,507		$	(291,141	)

Our expense (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory rate to income (loss) before taxes. The sources and tax effects of the differences are as follows (in thousands):

	Year Ended December 31,
	2020					2019					2018
Pre-tax income (loss)	$	(170,032	)			$	346,769				$	(76,156	)
Statutory rate		(35,707	)	21.0	%		72,822		21.0	%		(15,993	)	21.0	%
State income tax net of federal benefit		(39,230	)	23.1	%		49,119		14.2	%		(2,202	)	2.9	%
Foreign		49		0.0	%		340		0.1	%		1,735		(2.3	)%
Net change in valuation allowance		437,597		(257.4	)%		(37,765	)	(10.9	)%		(277,924	)	364.9	%
Net operating loss expiration		—		0.0	%		—		0.0	%		8,864		(11.6	)%
TEGSEDI licensing gain		—		0.0	%		—		0.0	%		59,583		(78.2	)%
Impact from outside basis differences		—		0.0	%		(16,344	)	(4.7	)%		—		0.0	%
Tax credits		(18,774	)	11.0	%		(22,296	)	(6.4	)%		(73,362	)	96.3	%
Deferred tax true-up		(206	)	0.1	%		646		0.2	%		9,947		(13.1	)%
Tax rate change		(29,131	)	17.1	%		1,811		0.5	%		(1,808	)	2.4	%
Non-deductible compensation		7,931		(4.7	)%		3,361		1.0	%		3,154		(4.1	)%
Other non-deductible items		193		(0.1	)%		329		0.1	%		(569	)	0.7	%
Stock-based compensation		17,435		(10.3	)%		(4,837	)	(1.4	)%		(4,199	)	5.5	%
Foreign-derived intangible income benefit		—		0.0	%		(2,071	)	(0.6	)%		—		0.0	%
Impacts from Akcea Acquisition		(22,032	)	13.0	%		—		—			—		—
Other		(1,391	)	0.8	%		(1,608	)	(0.5	)%		1,633		(2.1	)%
Effective rate	$	316,734		(186.4	)%	$	43,507		12.6	%	$	(291,141	)	382.3	%

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 our deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows (in thousands):

	Year Ended December 31,
	2020			2019
Deferred Tax Assets:
Net operating loss carryovers	$	83,681		$	20,191
Tax credits		245,746			210,455
Deferred revenue		124,452			127,763
Stock-based compensation		80,055			65,703
Intangible and capital assets		98,443			77,861
Other		13,402			12,510
Total deferred tax assets	$	645,779		$	514,483
Deferred Tax Liabilities:
Convertible debt	$	(2,920	)	$	(6,110	)
Fixed assets		(3,611	)		(1,958	)
Other		(5,808	)		(3,884	)
Net deferred tax asset	$	633,440		$	502,531
Valuation allowance		(633,440	)		(196,974	)
Total net deferred tax assets and liabilities	$	—		$	305,557

We evaluate our deferred tax assets regularly to determine whether adjustments to the valuation allowance are appropriate due to changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings. Our material assumptions are our forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment. Although we believe our estimates are reasonable, we are required to use significant judgment in determining the appropriate amount of valuation allowance recorded against our deferred tax assets.

Ionis and Akcea have filed separate U.S. federal income tax returns since Akcea’s IPO in 2017. Accordingly, we were required to assess our Ionis stand-alone and Akcea’s valuation allowances separately even though we consolidate Akcea’s financial results in our consolidated financial statements. However, as a result of the Akcea acquisition, Ionis and Akcea will file a consolidated U.S. federal income tax return beginning in the fourth quarter of 2020, and we therefore assessed our U.S. federal valuation allowance requirements on a consolidated basis as of that period. We continue to assess the state portion of our valuation allowance on a consolidated basis.

We assessed our valuation allowance requirements and recorded a valuation allowance of $313 million against all of Ionis’ U.S. federal net deferred tax assets in the fourth quarter of 2020, due to uncertainties related to our ability to realize the tax benefits associated with these assets. This determination is based largely on Akcea rejoining the Ionis U.S. consolidated federal tax group in the fourth quarter of 2020. Due to Akcea’s historical and projected financial statement losses, and the negative impact this is expected to have on Ionis’ consolidated taxable income, there is uncertainty of generating sufficient consolidated pre-tax income in future periods to realize the Ionis deferred tax benefits. It is also expected that Ionis’ pre-tax income in future periods may be lower due to increased research and development expenses associated with our pipeline of wholly owned medicines. We now maintain a valuation allowance against all our consolidated U.S. federal and state net deferred tax assets.

Our valuation allowance increased by $436 million from December 31, 2019 to December 31, 2020. $313 million of the increase related to the valuation allowance established against our beginning of the year balance of Ionis’ U.S. federal net deferred tax assets as discussed above, which resulted in us recognizing income tax expense during 2020. The remaining increase in our valuation allowance related to current year changes in our net deferred tax assets.

At December 31, 2020, we had federal and state, primarily California, tax net operating loss carryforwards of $243.3 million and $346.3 million, respectively. Our federal tax loss carryforwards are available indefinitely. Our California tax loss carryforwards will begin to expire in 2031. At December 31, 2020, we also had federal and California research and development tax credit carryforwards of $210.5 million and $87.4 million, respectively. Our Federal research and development tax credit carryforwards will begin to expire in 2034. 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 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):

	Year Ended December 31,
	2020			2019			2018
Beginning balance of unrecognized tax benefits	$	69,784		$	68,301		$	78,014
Decrease for prior period tax positions		(24,154	)		(867	)		(12,814	)
Increase for prior period tax positions		7,023			736			—
Increase for current period tax positions		1,510			1,614			3,101
Ending balance of unrecognized tax benefits	$	54,163		$	69,784		$	68,301

Included in the balance of unrecognized tax benefits at December 31, 2020 and 2019 was $6.4 million and $0.4 million respectively, that if we recognized, could impact our effective tax rate, subject to our remaining valuation allowance. None of our unrecognized tax benefits recorded at December 31, 2018 would impact our effective tax rate, if we recognized them.

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. During the year ended December 31, 2020, we recognized $0.3 million of accrued interest and penalties related to gross unrecognized tax benefits. We did not record any accrued interest and penalties for the years ended December 31, 2019 and 2018.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. Our tax years for 1999 through 2019 are subject to examination by the U.S. federal, state and foreign 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 as we consider those earnings to be permanently reinvested. It is not practicable for us to calculate the amount of unrecognized deferred tax liabilities associated with these earnings.