NOTE 14—INCOME TAXES

The Tax Reform Act was enacted in December 2017.  The Tax Act significantly changes 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 Tax Act reduces the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, we revalued our ending net deferred tax assets and liabilities at December 31, 2017 and recognized a $6.9 million tax expense that was offset by a change in valuation allowance.

The Tax Act provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”).  The Company currently has one foreign subsidiary that has not commenced operations.  As a result, the international aspects of the Tax Act are not applicable. The Company applied the guidance in Staff Accounting Bulletin, or SAB, 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. During 2018, the Company completed its 2017 income tax returns and the Company’s accounting for the enactment-date income tax effects of the Act with no adjustments to the provisional amounts at December 31, 2017.

For the years ended December 31, 2018 and 2017, the Company did not record an income tax provision due to net operating losses and the inability to record an income tax benefit.

A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying statements of operations is as follows (in thousands):

The tax effects of temporary differences that give rise to significant components of the net deferred tax assets are as follows (in thousands):

At December 31, 2018, the Company had federal net operating loss carryforwards of approximately $95.0 million available to offset future taxable income. The Company’s federal net operating loss carryforwards will begin to expire in 2021 if not used before such time to offset future taxable income or tax liabilities. For federal and state income tax purposes, a portion of the Company’s net operating loss carryforward is subject to certain limitations on annual utilization in case of changes in ownership, as defined by federal and state tax laws. The annual limitation may result in the expiration of the net operating loss before utilization.

At December 31, 2018, the Company had federal research and development tax credits of approximately $1.9 million, which expire in the year beginning 2022, and state research and development tax credits of approximately $0.2 million, which have no expiration date.

The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. The valuation allowance increased by $2.8 million from continuing operations.

The total amount of unrecognized benefits as of December 31, 2018 and 2017 was $0 million and $1.1 million, respectively.  The reconciliation of unrecognized tax benefits at the beginning and end of the year is as follows:

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2018 and 2017, the Company had no accrued interest or penalties due to the Company’s net operating losses available to offset any tax adjustment. The Company currently has no federal or state tax examinations in progress nor has it had any federal or state tax examinations since its inception. As a result of the Company’s net operating loss carryforwards, all of its tax years are subject to federal and state tax examination.