|12 Months Ended|
Dec. 31, 2018
|Income Tax Disclosure [Abstract]|
10. Income Taxes
The Company has $0.1 million income tax benefit for the year ended December 31, 2018 related to prior year return to provision adjustment and $1.7 million of income tax expense for the year ended December 31, 2017. The Company is subject to an ownership change pursuant to IRC Section 382 that occurred in February 2017, which significantly limited its ability to use its net operating loss carryforwards and tax credits against its 2017 taxable income.
The provision (benefit) for income taxes (all current) consists of the following (in thousands):
Reconciliation between the tax provision computed at the federal statutory income tax rate and the Company’s actual effective income tax rate is as follows:
The significant components of net deferred tax assets at December 31, 2018 and 2017 were as follows (in thousands):
The net increase (decrease) in the valuation allowance was $5.8 million and $(166.1) million, for the years ended December 31, 2018 and 2017, respectively.
Accounting standards provide for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s four sources of taxable income including historical operating performance and the repeal of net operating loss carryback, the Company has determined that total deferred tax assets should be fully offset by a valuation allowance.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. At December 31, 2017, the Company recorded tax related disclosures for the impact of the Tax Act effects using the current available information and technical guidance on the interpretations of the Tax Act. As permitted by the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118"), the Company has completed its accounting analysis based on the guidance, interpretations, and data available as of December 31, 2018. No financial statement adjustment was made in the fourth quarter of 2018 upon finalization of our accounting analysis.
Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-change Net Operating Losses ("NOLs") and certain other pre-change tax attributes that can be utilized to annual limitations), the Company experienced an ownership change in February 2017 which substantially limits the future use of its pre-change "NOLs and certain other pre-change tax attributes per year. The Company has excluded the related tax attributes that will expire as a result of the annual limitations in the deferred tax assets as of December 31, 2017 and December 31, 2018. To the extent that the Company does not utilize its carry-forwards within the applicable statutory carryforward periods, either because of Section 382 limitations or the lack of sufficient taxable income, the carryforwards will expire unused.
As of December 31, 2018, the Company had federal net operating loss carry-forwards of approximately $48.8 million and state net operating loss carry-forwards of approximately $39.1 million to offset future taxable income. The net operating loss carryforwards begin to expire in 2036 for federal and 2033 for state purposes. The Company had federal orphan credit of $1.2 million which if not utilized will expire in 2037. The Company also had $19.8 million of California research and development tax credits which have no expiration date.
Under the Tax Act, although the treatment of tax losses generated in taxable years ending before December 31, 2017 has generally not changed, tax losses generated in taxable years beginning after December 31, 2017 can be carried forward indefinitely but may only be utilized to offset 80% of taxable income annually.
The Company files income tax returns in the U.S. federal jurisdiction, California, Maryland and Texas. The Company’s federal income tax returns for tax years 2015 and beyond remain subject to examination by the Internal Revenue Service. The Company’s state income tax returns for tax years 2014 and beyond remain subject to examination by state tax authorities. In addition, all of the net operating losses and research and development credit carry-forwards that may be used in future years are still subject to adjustment.
The following table summarizes the Company's activity related to its unrecognized tax benefits (in thousands):
As of December 31, 2018, the Company had a total of $4.5 million of net unrecognized tax benefits, none of which would affect the effective tax rate upon realization. The Company currently has a full valuation allowance against its U.S. net deferred tax assets which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.
The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months. The Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Through December 31, 2018, the Company has not accrued interest or penalties related to uncertain tax positions.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef