Income Taxes

The Company generated a pretax loss of $31.4 million, $33.7 million and $29.4 million in the United States for the years ended December 31, 2016, 2015 and 2014, respectively. Since inception, the Company has not generated any pretax income or loss outside of the United States. The Company recorded no provision for income taxes during the years ended December 31, 2016, 2015 or 2014.

The Company follows FASB ASC No. 740, Income Taxes for the Computation and Presentation of its Tax Provision. The following table presents a reconciliation of the tax expense computed at the statutory federal rate and the Company's tax expense for the periods presented (in thousands of dollars):



	Year Ended December, 31,
	2016			2015			2014
U.S. federal taxes at statutory rate	$	(10,662	)	$	(11,459	)	$	(9,987	)
State tax (net of federal benefit)	20			(30		)	5
Permanent differences	153			96			64
Incentive stock options	1,095			789			672
Tax credits	(677		)	(581		)	(461		)
Change in valuation allowance	10,071			11,185			9,707
Total	$	—		$	—		$	—

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands of dollars):



	Year Ended December 31,
	2016			2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	61,674		$	52,262		$	41,971
Research and development credits	3,174			2,497			1,916
Stock-based compensation	2,847			1,825			826
Genzyme co-promotion agreement	—			330			995
Accruals, deferred rent and other	4,511			4,698			3,381
Gross deferred tax assets	72,206			61,612			49,089
Valuation allowance	(65,975		)	(55,101		)	(43,439		)
Net deferred tax assets	6,231			6,511			5,650
Deferred tax liabilities:
Property and equipment	(1,180		)	(1,215		)	(60		)
In-process research and development	(5,051		)	(5,296		)	(5,590		)
Gross deferred tax liabilities	(6,231		)	(6,511		)	(5,650		)
Net deferred tax liabilities	(6,231		)	(6,511		)	(5,650		)
Net deferred taxes	$	—		$	—		$	—

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, related to balance sheet classification of deferred taxes. The ASU requires that deferred tax assets and liabilities be classified as noncurrent in the statement of financial position, thereby simplifying the guidance that required an entity to separate deferred assets and liabilities into current and noncurrent amounts, and was effective for the Company beginning in the first quarter of 2016. The Company early-adopted the ASU as of December 31, 2015 and its statement of financial position as of this date reflects the revised classification of current deferred tax assets and liabilities as noncurrent.

The Company has established a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding realization of such assets. The valuation allowance increased $10.9 million, $11.7 million and $10.6 million during the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, the Company had net operating loss carryforwards of approximately $169.1 million and $84.2 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. Of these amounts, $1.6 million represent federal and state excess tax deductions from stock-based compensation, which will be recorded as an adjustment to additional paid-in capital when they reduce tax payable. The U.S. federal net operating loss carryforwards will begin to expire in 2026 while for state purposes, the net operating losses began to expire in 2016.

As of December 31, 2016, the Company had net credit carryforwards of approximately $3.3 million and $2.7 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively. The federal credit carryforwards begin to expire in 2028. California credits have no expiration date. Other state credit carryforwards begin to expire in 2023.

On December 18, 2015, The Consolidated Appropriations Act of 2014 was signed into law, which retroactively reinstated and made permanent the federal research tax credit provisions from January 1, 2015 through December 31, 2015.

The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Accordingly, a company's ability to use net operating losses and tax credits may be limited as prescribed under Internal Revenue Code Section 382 and 383 ("IRC Section 382"). Events which may cause limitations in the amount of the net operating losses or tax credits that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 rules and similar state provisions. In the event the Company has any changes in ownership, net operating losses and research and development credit carryovers could be limited and may expire unutilized.

Uncertain Tax Positions

As of December 31, 2016, the Company had unrecognized tax benefits of $2.2 million, none of which would currently affect the Company's effective tax rate if recognized due to the Company's deferred tax assets being fully offset by a valuation allowance. The Company does not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at December 31, 2016 will significantly increase or decrease within the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands of dollars):



	Year Ended December 31,
	2016		2015		2014
Unrecognized tax benefits, beginning of period	$	1,871	$	1,571	$	727
Gross increases—tax position in prior period	—		—		548
Gross decreases—tax position in prior period	—		—		—
Gross increases—current period tax position	351		300		296
Lapse of statute of limitations	—		—		—
Unrecognized tax benefits, end of period	$	2,222	$	1,871	$	1,571

It is the Company's policy to include penalties and interest expense related to income taxes as a component of other income (expense), net, and interest expense, respectively, as necessary. There was no interest expense or penalties related to unrecognized tax benefits recorded through December 31, 2016.

The Company's major tax jurisdictions are the United States and California. All of the Company's tax years will remain open for examination by the Federal and state tax authorities for three and four years, respectively, from the date of utilization of the net operating loss or research and development credit. The Company does not have any tax audits pending.