Provision For (Benefit From) Income Taxes

12 Months Ended

Jan. 01, 2021

Provision For (Benefit From) Income Taxes

PROVISION FOR (BENEFIT FROM) INCOME TAXES

Our income before income taxes is derived solely from within the U.S. Our provision for (benefit from) income taxes was as follows (in thousands):


	Year Ended December 31,
	2020		2019		2018
Current:
Federal	$	—	$	—	$	—
State	3,791		6,095		6,133
Total current tax expense	$	3,791	$	6,095	$	6,133
Deferred:
Federal	$	14,886	$	71,580	$	(238,675)
State	379		(578)		(5,436)
Total deferred tax expense (benefit)	15,265		71,002		(244,111)
Provision for (benefit from) income taxes	$	19,056	$	77,097	$	(237,978)

The provision for income taxes for the years ended December 31, 2020 and 2019 primarily relates to the utilization of federal net operating loss and state taxes in jurisdictions outside of California, for which we do not have net operating loss carryforwards due to a limited operating history. The benefit from income taxes for the year ended December 31, 2018 primarily relates to the release of our valuation allowance against significantly all of our deferred tax assets offset by state taxes in jurisdictions outside of California. Our historical net operating losses were sufficient to fully offset any federal taxable income for the years ended December 31, 2020, 2019 and 2018.

The reconciliation of the U.S. federal income tax provision at the statutory federal income tax rate of 21% for each of the years ended December 31, 2020, 2019 and 2018, respectively, to our provision for (benefit from) income taxes was as follows (in thousands):


	Year Ended December 31,
	2020		2019		2018
U.S. federal income tax provision at statutory rate	$	27,476	$	83,603	$	94,939
State tax (benefit) expense	(2,232)		1,148		4,690
Change in valuation allowance	5,525		3,208		(315,394)
Research credits	(11,356)		(8,299)		(18,308)
Stock-based compensation	(20,399)		(9,177)		(5,998)
Non-deductible executive compensation	18,067		4,228		1,111
Branded prescription drug fee	2,537		1,099		371
Other	(562)		1,287		611
Provision for (benefit from) income taxes	$	19,056	$	77,097	$	(237,978)

Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.

Our deferred tax assets and liabilities were as follows (in thousands):


	December 31,
	2020		2019
Deferred tax assets:
Net operating loss carryforwards	$	37,454	$	65,131
Tax credit carryforwards	126,625		110,037
Depreciation and amortization	18,414		26,792
Stock-based compensation	19,818		14,966
Lease liabilities	11,908		11,211
Accruals and reserves not currently deductible	12,207		8,248
Deferred revenue	7,637		6,547
Other assets	—		345
Total deferred tax assets	234,063		243,277
Valuation allowance	(67,185)		(61,659)
Net deferred tax assets	166,878		181,618
Deferred tax liabilities:
Lease right-of-use assets	(9,510)		(9,244)
Other liabilities	(657)		—
Total deferred tax liabilities	(10,167)		(9,244)
Net deferred taxes	$	156,711	$	172,374

ASC Topic 740: Income Taxes (Topic 740) requires that the tax benefit of net operating losses, temporary differences and credit carry forwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carry forward period. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, based on the evaluation and weighting of both positive and negative evidence, including our achievement of a cumulative three-year income position as of December 31, 2020 and forecasts of future operating results, as well as considering the utilization of net operating losses and tax credits prior to their expiration, management determined that there is sufficient positive evidence to conclude that it is more likely than not the deferred tax assets are realizable. As of December 31, 2020 and 2019, we continue to carry a valuation allowance of $67.2 million and $61.7 million, respectively, against our California state deferred tax assets. The valuation allowance increased by $5.5 million and $3.5 million during the years ended December 31, 2020 and 2019, respectively.

At December 31, 2020, we had federal net operating loss carryforwards of approximately $92.6 million, which will begin to expire in 2036, and federal business tax credits of approximately $127.4 million which expire in the years 2021 through 2040. We also had state net operating loss carryforwards of approximately $427.9 million, which expire in the years 2021 through 2036, and California research and development tax credits of approximately $42.9 million, which do not expire, and California Competes Tax Credits of approximately $1.6 million, which expire in 2026.

Under the Internal Revenue Code and similar state provisions, certain substantial changes in our ownership could result in an annual limitation on the amount of net operating loss and credit carryforwards that can be utilized in future years to offset future taxable income. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization. We completed a Section 382 analysis through December 31, 2020, and concluded that an ownership change, as defined under Section 382, had not occurred.

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):


	Year Ended December 31,
	2020		2019		2018
Beginning balance	$	79,078	$	76,060	$	79,342
Change relating to prior year provision	591		589		(4,254)
Change relating to current year provision	3,305		2,429		1,083
Reductions based on the lapse of the applicable statutes of limitations	(2,033)		—		(111)
Ending balance	$	80,941	$	79,078	$	76,060

We do not anticipate that the amount of unrecognized tax benefits existing as of December 31, 2020 will significantly change over the next 12 months. As of December 31, 2020, we had $80.9 million in unrecognized tax benefits, of which 50.1 million would reduce our provision for income taxes and the effective tax rate, if recognized. Interest and penalties were nominal or zero for all periods presented. We have elected to record interest and penalties in the accompanying Consolidated Statements of Income as a component of income taxes.

We file U.S. and state income tax returns in jurisdictions with varying statues of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2001 through 2020 tax years generally remain subject to examination by federal and most state tax authorities to the extent net operating losses and credits generated during these periods are being utilized in the open tax periods.

- Definition

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.

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