19. Income Taxes

We file income tax returns in the U.S., Italy and the U.K. A substantial part of our operations takes place in the State of Washington, which does not impose an income tax as that term is defined in ASC 740, Accounting for Income Taxes. As such, our state income tax expense or benefit, if recognized, would be immaterial to our operations. We are not currently under examination by an income tax authority, nor have we been notified that an examination is contemplated.

The U.S. signed into law, on December 22, 2017, tax reform legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017, or the 2017 Tax Act. The 2017 Tax Act was enacted in December 2017. The 2017 Tax Act significantly changed U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The 2017 Tax Act reduced the U.S. corporate income tax rate from 34% to 21%, effective January 1, 2018.

The SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. At December 31, 2017, we had completed our accounting for all of the enactment date income tax effects of the 2017 Tax Act.

While the 2017 Tax Act provides for a modified territorial tax system, beginning in 2018, Global Intangible Low-Taxed Income, or GILTI provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. During 2018, we made an accounting policy election to treat taxes related to GILTI as a current period expense when incurred.

Loss before income taxes is attributable to the following tax jurisdictions (in thousands):



	Year ended December 31,
	2018			2017
United States	$	(29,162	)	$	(40,180	)
Foreign	(190		)	(651		)
Net loss before income taxes	$	(29,352	)	$	(40,831	)

The reconciliation between the income tax rate and our effective tax rate as of December 31 is as follows:



	2018		2017
Federal income tax rate	21	%	34	%
Research and development tax credits	6		3
Non-deductible executive compensation	(1	)	—
Valuation allowance	(12	)	304
Impact of tax reform	—		(101	)
Expired tax attribute carryforwards	(17	)	(240	)
Gain on branch liquidation	3		—
Foreign currency gains and losses	2		—
Other	(2	)	—
Net effective tax rate	—	%	—	%

The principal components of our deferred tax assets and liabilities as of December 31 were as follows (in thousands):



	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	18,792		$	21,005
Capitalized research and development	32,029			27,540
Research and development tax credit carryforwards	3,061			1,347
Stock-based compensation	2,940			2,004
Intangible assets	7,802			8,117
Depreciation and amortization	549			472
Other deferred tax assets	1,806			2,279
Total deferred tax assets	66,979			62,764
Less: valuation allowance	(66,698		)	(62,472		)
	281			292
Deferred tax liabilities:
Deductions for tax in excess of financial statements	(281		)	(292		)
Total deferred tax liabilities	(281		)	(292		)
Net deferred tax assets	$	—		$	—

In preparing our December 31, 2018 financial statements, we determined that our December 31, 2017 deferred tax asset balance related to stock-based compensation and the corresponding valuation allowance were each overstated by $10.8 million. We evaluated the materiality of this adjustment and concluded that its impact was not material on our financial statements taken as a whole and did not affect our balance sheet, or statements of operations, stockholders' equity or cash flows, for any periods presented. We have elected to adjust the 2017 balances in the table above.

As of December 31, 2018 and 2017, we had U.S. federal net operating loss carryforwards, or the NOL, of approximately $56.6 million and $74.8 million respectively, which are available to reduce future taxable income. We also had U.S. federal tax credits of $3.1 million and $1.3 million as of December 31, 2018 and 2017, respectively, which may be used to offset future tax liabilities. The NOL and tax credit carryforwards have begun to expire in 2018 and may become subject to annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, or the IRC, of 1986, as amended. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or future tax liabilities. We have undertaken a formal IRC Section 382 study and the attributes disclosed in this footnote reflect the conclusion of that study. However, subsequent ownership changes may further affect the limitation in future years.

At December 31, 2018, the NOL carryforwards in the U.K.,which have an indefinite carryforward period, were approximately $33.0 million.

Certain of the net operating loss deferred tax assets in the table above, totaling $9.9 million at December 31, 2018 are consolidated in our GAAP income tax provision due to our 60% ownership in Aequus; however, Aequus is not consolidated for income tax purposes and therefore these net operating losses will not be available to us in our future tax filings.

We maintain a full valuation allowance on our net deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In our valuation, we considered our cumulative loss in recent years and forecasted losses in the near term as significant negative evidence. Based upon a review of the four sources of income identified within ASC 740, we determined that the negative evidence outweighed the positive evidence and that a full valuation allowance on our net deferred tax assets will be maintained. We will continue to assess the realizability of our deferred tax assets going forward and will adjust the valuation allowance as needed. Our valuation allowance increased by $4.2 million during the year ended December 31, 2018 primarily due to increases in capitalized research and development and research and development tax credit carryforwards, offset by net operating loss carryforward expirations.

We follow the provisions in ASC 740 and the guidance related to accounting for uncertainty in income taxes. We determine our uncertain tax positions based on a determination of whether and how much of a tax benefit taken by us in our tax filings or positions is more likely than not to be sustained upon examination by the relevant income tax authorities. We are subject to U.S. federal and state, Italian and U.K. income taxes with varying statutes of limitations. Tax years from 1999 forward remain open to examination due to the carryover of net operating losses or tax credits. Our policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. As of December 31, 2018, we had no unrecognized tax benefits and therefore no accrued interest or penalties related to unrecognized tax benefits. We believe that our income tax filing positions reflected in the various tax returns are more-likely-than not to be sustained on audit and thus there are no anticipated adjustments that would result in a material change to our consolidated balance sheets, statements of operations and cash flows. Therefore, no reserves for uncertain income tax positions have been recorded.