12. Income Taxes

BioTime adopted early the provisions of Accounting Standards Update, ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, on a retrospective basis and due to the full valuation allowance on its deferred tax assets for all periods presented. The adoption of ASU 2015-17 did not have any impact on the consolidated financial statements.

The primary components of the deferred tax assets and liabilities at December 31, 2016 and 2015 were as follows (in thousands):

Deferred tax assets/(liabilities):	2016			2015
Net operating loss carryforwards	$	78,116		$	78,268
Research and development and other credits		7,645			8,331
Patents and licenses		(67	)		(6,860	)
Equity method investments		(40,258	)		(1,333	)
Stock options		1,529			670
Other, net		2,248			(263	)
Total		49,213			78,813
Valuation allowance		(49,213	)		(78,813	)
Net deferred tax liabilities	$	-		$	-

Income taxes differed from the amounts computed by applying the U.S. federal income tax of 34% to pretax losses from operations as a result of the following:

	Year Ended December 31,
	2016		2015		2014
Computed tax benefit at federal statutory rate		34%		34%		34%
Research and development and other credits		(3%)		2%		3%
Permanent differences		2%		(4%)		(1%)
Change in valuation allowance		(63%)		(34%)		(24%)
State tax benefit, net of effect on federal income taxes		24%		10%		3%
Foreign rate differential		6%		(1%)		(1%)
		-%		7%		14%

As of December 31, 2016, BioTime has net operating loss carryforwards of approximately $171.1 million for federal purposes. Of this amount, $22.7 million is attributable to LifeMap Sciences, and $30.6 million is attributable to Oncocyte. As BioTime, LifeMap Sciences and OncoCyte file separate federal income tax returns, their respective net operating loss carryforwards may not be used to offset each other’s taxable income. As of December 31, 2016, BioTime has net operating losses of $95 million for state tax purposes. Of this amount, $15.1 is attributable to OncoCyte. Historically, both LifeMap Sciences and OncoCyte have been included in the combined California tax return with BioTime. As a result of the OncoCyte Deconsolidation on February 17, 2017 (see Note 16), OnCoyte will file a separate California return for tax year 2017. Accordingly, the California net operating loss carryforwards attributable to OncoCyte will not be available to BioTime or LifeMap Sciences. The federal and state net operating losses expire in varying amounts between 2018 and 2036. As of December 31, 2016, BioTime’s subsidiaries have foreign net operating loss carryforwards of approximately $58.5 million which carry forward indefinitely.

As of December 31, 2016, BioTime has research tax credit carryforwards for federal and state tax purposes of $3.8 million and $3.9 million, respectively. The federal tax credits expire between 2018 and 2036, while the state tax credits have no expiration date.

Although the Asterias Deconsolidation was not a taxable transaction to BioTime and did not result in a tax payment obligation, the $49.0 million gain on the Asterias Deconsolidation generated a deferred tax liability that was fully offset by BioTime’s net operating losses. Subsequent to the Asterias Deconsolidation, an unrealized gain of $34.3 million was recorded on the Asterias shares during the year ended December 31, 2016, which was fully offset by available net operating losses and the corresponding release of BioTime’s valuation allowance on deferred tax assets. Accordingly, BioTime did not record any provision or benefit for income taxes for the year ended December 31, 2016. The deferred tax liability generated by the Asterias shares BioTime holds are a source of taxable income as prescribed by ASC 740-10-30-17.

BioTime and Asterias completed certain transactions under a Cross-License Agreement and Share Transfer Agreement on February 16, 2016 pursuant to which BioTime transferred certain assets to Asterias. The asset transfer was a taxable transaction to BioTime generating a taxable gain of approximately $3.1 million. BioTime has sufficient current year losses from operations to offset the entire gain resulting in no income taxes due. As the transfer of assets and the resulting taxable gain was due to a direct effect of transations between a parent company, BioTime, and its then subsidiary, Asterias, BioTime recorded the tax effects of this gain through equity in accordance with ASC 740-20-45-11(g) with a corresponding release of the valuation allowance.

A deferred income tax benefit of $4.5 million was recorded for the year ended December 31, 2015, of which $4.8 million was related to the federal benefit and $290,000 was related to state tax expense. A deferred income tax benefit of $7.4 million was recorded for the year ended December 31, 2014, of which $5.2 million of the benefit was related to federal and $2.2 million was related to state taxes. The deferred tax benefits recorded in 2015 and 2014 were wholly attributable Asterias.

A valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax assets will not be realized. BioTime established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries.

On December 31, 2015, BioTime distributed 4.7 million shares of OncoCyte common stock to its shareholders on a pro rata basis. The distribution was accounted for as a dividend in kind for financial reporting purposes. For income tax purposes, the distribution is treated as if BioTime had sold the shares at their fair market value, resulting in a taxable gain to BioTime of approximately $7.4 million. As part of the distribtuion of OncoCyte common stock in December 2015, Asterias also recognized a taxable gain $819,000. Asterias has sufficient current year losses from operations to offset the entire taxable gain resulting in no income taxes due. As the distribution was treated as a dividend in kind for financial reporting purposes, BioTime recorded the tax effect of the gain in equity instead of the tax provision in accordance ASC 740-20-45-11(g). BioTime had sufficient current year losses from operations to offset the entire taxable gain resulting in no income taxes due.

During 2015, OncoCyte sold 259,712 BioTime common shares in open market transactions that resulted in a taxable gain of $815,000. This taxable gain was fully offset by current operating losses resulting in no income taxes due from the sale.

In connection with the above transactions related to the taxable gains, BioTime and subsidiaries utilized approximately $9.1 million in net operating loss carryforwards with a corresponding release of the valuation allowance recorded through equity in accordance with ASC 740-20-45-11(g).

Internal Revenue Code Section 382 places a limitation (“Section 382 Limitation”) on the amount of taxable income that can be offset by net operating loss (“NOL”) carryforwards after a change in control (generally greater than 50% change in ownership within a three-year period) of a loss corporation. California has similar rules. Generally, after a control change, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods.

BioTime files a U.S. federal income tax return as well as various state and foreign income tax returns. In general, BioTime is no longer subject to tax examination by major taxing authorities for years before 2012. Although the statute is closed for purposes of assessing additional income and tax in these years, the taxing authorities may still make adjustments to the net operating loss and credit carryforwards used in open years. Therefore, the statute should be considered open as it relates to the net operating loss and credit carryforwards.

BioTime's practice is to recognize interest and penalties related to income tax matters in tax expense. As of December 31, 2016 and 2015, BioTime has no accrued interest and penalties. BioTime may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. BioTime's management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.