Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes [Abstract]

Income Taxes

5. Income Taxes

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

	Year Ended December 31,
	2021			2020			2019
				(as revised*)			(as revised*)
United States	$	(29,966	)	$	(137,222	)	$	336,277
Foreign		818			2,670			2,489
Income (loss) before income taxes	$	(29,148	)	$	(134,552	)	$	338,766

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

	Year Ended December 31,
	2021			2020			2019
				(as revised*)			(as revised*)
Current:
Federal	$	(200	)	$	(837	)	$	35,861
State		(690	)		3,782			14,329
Foreign		339			518			413
Total current income tax expense (benefit)		(551	)		3,463			50,603
Deferred:
Federal		—			341,728			904
State		—			—			—
Total deferred income tax benefit		—			341,728			904
Total income tax expense (benefit)	$	(551	)	$	345,191		$	51,507

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,
	2021					2020					2019
						(as revised*)					(as revised*)
Pre-tax income (loss)	$	(29,148	)			$	(134,552	)			$	338,766
Statutory rate		(6,121	)	21.0	%		(28,256	)	21.0	%		71,141		21.0	%
State income tax net of federal benefit		4,278		(14.7	)%		(37,705	)	28.0	%		49,000		14.5	%
Foreign		143		(0.5	)%		49		0.0	%		340		0.1	%
Net change in valuation allowance		2,885		(9.9	)%		460,898		(342.5	)%		(37,314	)	(11.0	)%
Loss on debt transactions		262		(0.9	)%		—		—			9,911		2.9	%
Impact from outside basis differences		—		—			—		—			(16,344	)	(4.8	)%
Tax credits		(23,198	)	79.6	%		(18,774	)	14.0	%		(22,296	)	(6.6	)%
Deferred tax true-up		(24	)	0.1	%		(206	)	0.2	%		646		0.2	%
Tax rate change		12,838		(44.0	)%		(32,951	)	24.5	%		1,248		0.4	%
Non-deductible compensation		5,085		(17.4	)%		7,931		(5.9	)%		3,361		1.0	%
Other non-deductible items		84		(0.3	)%		193		(0.1	)%		329		0.1	%
Stock-based compensation		4,720		(16.2	)%		17,435		(13.0	)%		(4,837	)	(1.4	)%
Foreign-derived intangible income benefit		—		—			—		—			(2,071	)	(0.6	)%
Impacts from Akcea Merger		—		—			(22,032	)	16.4	%		—		—
Other		(1,503	)	5.1	%		(1,391	)	0.9	%		(1,607	)	(0.6	)%
Effective rate	$	(551	)	1.9	%	$	345,191		(256.5	)%	$	51,507		15.2	%

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, 2021 and 2020 are as follows (in thousands):

	Year Ended December 31,
	2021			2020
				(as revised*)
Deferred Tax Assets:
Net operating loss carryovers	$	85,600		$	83,681
Tax credits		269,538			245,746
Deferred revenue		104,330			124,452
Stock-based compensation		86,611			80,055
Intangible and capital assets		92,542			98,443
Convertible debt		45,681			22,395
Interest expense limitation		6,996			—
Other		15,048			13,402
Total deferred tax assets	$	706,346		$	668,174
Deferred Tax Liabilities:
Fixed assets		(3,303	)		(3,611	)
Other		(5,270	)		(5,808	)
Net deferred tax asset	$	697,773		$	658,755
Valuation allowance		(697,773	)		(658,755	)
Total net deferred tax assets and liabilities	$	—		$	—

* We revised our 2020 and 2019 amounts to reflect the simplified convertible instruments accounting guidance, which we adopted retrospectively. Refer to Note 1, Organization and Significant Accounting Policies, for further information.

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 filed separate U.S. federal income tax returns from the date of Akcea’s IPO in 2017 through October 12, 2020, the date on which we completed the Akcea Merger. As a result of the Akcea Merger, Ionis and Akcea now file a consolidated U.S. federal income tax return, and we now assess our U.S. federal and state valuation allowance requirements on a consolidated basis.

We assessed our valuation allowance requirements and recorded a valuation allowance of $341 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. We based this determination largely on Akcea rejoining the Ionis consolidated U.S. federal tax group in the fourth quarter of 2020. Due to Akcea’s historical and projected financial statement losses, and the expected negative impact this will have on Ionis’ consolidated taxable income, we are uncertain if we will generate sufficient consolidated pre-tax income in future periods to realize the Ionis deferred tax benefits. We also expect that Ionis’ pre-tax income in future periods will be lower due to significant investments in research and development 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 $39 million from December 31, 2020 to December 31, 2021. The increase was primarily related to increases in our deferred tax assets for tax credits and convertible debt offset against a decrease in our deferred tax asset for deferred revenue.

At December 31, 2021, we had federal and state, primarily California, tax net operating loss carryforwards of $271.5 million and $333.8 million, respectively. Our federal tax loss carryforwards are available indefinitely. Our California tax loss carryforwards will begin to expire in 2031. At December 31, 2021, we also had federal and California research and development tax credit carryforwards of $225.5 million and $99.7 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,
	2021			2020			2019
Beginning balance of unrecognized tax benefits	$	54,163		$	69,784		$	68,301
Decrease for prior period tax positions		(695	)		(24,154	)		(867	)
Increase for prior period tax positions		263			7,023			736
Increase for current period tax positions		1,354			1,510			1,614
Ending balance of unrecognized tax benefits	$	55,085		$	54,163		$	69,784

Included in the balance of unrecognized tax benefits at December 31, 2021, 2020 and 2019 was $6.2 million, $6.4 million and $0.4 million respectively, that if we recognized, could impact our effective tax rate, subject to our remaining valuation allowance.

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, 2021 and 2020, we recognized $0.5 million and $0.3 million, respectively, 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.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. Our tax years for 1999 through 2020 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.