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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

8. Income Taxes

 

Tax Rates Applicable to the Income of the Company and its Subsidiaries

The Company is taxed according to U.S. federal and state tax laws and Israeli tax laws. The statutory tax rates applicable to the income of the Company and its subsidiaries for the periods presented are as follows:

 

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

89bio, Inc.

 

 

21

%

 

 

21

%

89Bio Ltd.

 

 

23

%

 

 

23

%

89bio Management, Inc.

 

 

21

%

 

 

21

%

UAB 89bio Lithuania

 

 

15

%

 

 

15

%

 

 

The income tax benefit is comprised of (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

Current:

 

 

 

 

 

 

 

 

Federal

 

$

—

 

 

$

(11

)

State

 

 

(2

)

 

 

1

 

Foreign

 

 

(1

)

 

 

—

 

Total

 

 

(3

)

 

 

(10

)

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

150

 

 

 

69

 

Total

 

 

150

 

 

 

69

 

Income tax benefit

 

$

147

 

 

$

59

 

 

Deferred Income Taxes

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 for the periods presented are as follows (in thousands):

 

 

 

As of December 31,

 

 

 

2021

 

 

2020

 

U.S. net operating loss carryforwards

 

$

29,094

 

 

$

11,342

 

Research and development expenses

 

 

6,529

 

 

 

5,392

 

Israel net operating loss carryforwards

 

 

4,262

 

 

 

3,978

 

Stock-based compensation

 

 

1,969

 

 

 

610

 

Accrued expenses

 

 

220

 

 

 

635

 

Other

 

 

191

 

 

 

48

 

Total deferred tax assets

 

 

42,265

 

 

 

22,005

 

Less: valuation allowance

 

 

(42,046

)

 

 

(21,936

)

Net deferred tax assets

 

$

219

 

 

$

69

 

 

As of December 31, 2021 and 2020, the Company recorded a valuation allowance of $42.0 million and $21.9 million, respectively, in respect of deferred tax assets resulting from tax loss carryforwards and other temporary differences. Realization of deferred tax assets is dependent upon future earnings, if any, the time and amount of which are uncertain. The Company regularly assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes based upon the weight of available evidence that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through an adjustment to income tax expense. The valuation allowance increased by $20.1 million in 2021, which primarily relates to significant taxable losses. The Company continues to record a partial valuation allowance against the deferred tax assets in Israel due to achievement of recent profitability and the expectation of future profitability in the jurisdiction. The valuation allowance increased by $11.9 million in 2020, which primarily relates to significant taxable losses. The change in valuation allowance during 2020 also includes a partial release of the valuation allowance against deferred tax assets in Israel due to achievement of recent profitability and the expectation of future profitability in the jurisdiction, which decreased the valuation allowance by $69,000 in 2020.

Available Carryforward Tax Losses and Credits

As of December 31, 2021, the Company had an accumulated tax loss carryforward of approximately $138.5 million and $18.5 million for U.S. and Israeli tax purposes, respectively. As of December 31, 2020, the Company had an accumulated tax loss carryforward of approximately $54.1 million and $17.3 million for U.S. and Israeli tax purposes, respectively. Federal net operating losses generated after 2017 can be carried forward indefinitely but utilization will be limited to 80% of taxable income in the period that net operating losses are being utilized. Carryforward tax losses in Israel have no expiration date.

 

As of December 31, 2021 and 2020, the Company had federal research and development credit carryforwards of approximately $2.1 million and $0.6 million, respectively, which expire beginning in 2040. As of December 31, 2021 and December 31, 2020, the Company has state research and development credit carryforwards of approximately $1.1 million and $0.7 million, respectively, which will carry forward indefinitely.

Loss from Operations, Before Income Tax

The Company recorded a loss from operations, before income tax for the periods presented as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

United States

 

$

(91,141

)

 

$

(58,760

)

Lithuania

 

 

10

 

 

 

(73

)

Israel

 

 

862

 

 

 

9,275

 

Net loss before income tax

 

$

(90,269

)

 

$

(49,558

)

Reconciliation of Income Tax Benefit

The reconciliation of income tax benefit based on the statutory tax rate to the effective tax rate for the periods presented is as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

Income tax benefit computed at statutory rates

 

$

18,757

 

 

$

8,285

 

Change in valuation allowance

 

 

(20,111

)

 

 

(11,914

)

Foreign rate differential

 

 

(19

)

 

 

1,671

 

Change in Israel effective tax rate due to the 2019

   reorganization

 

 

(2

)

 

 

647

 

Research and development credits, net of

   uncertain tax position

 

 

1,331

 

 

 

815

 

Other

 

 

191

 

 

 

555

 

Income tax benefit

 

$

147

 

 

$

59

 

 

Utilization of U.S. federal and state net operating losses and credit carryforwards may be subject to an annual limitation provided for in Section 382 of the Internal Revenue Code and similar state codes. Any annual limitation could result in a deferral of the utilization of the net operating loss and credit carryforwards.

Unrecognized Tax Benefits

During the years ended December 31, 2021 and 2020, the amount of gross unrecognized tax benefits increased by $0.5 million and $0.3 million, respectively. If the total amount of unrecognized tax benefits was recognized, it would not have an impact to the effective tax rate as it would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance.

The Company recognizes interest and penalties related to uncertain tax positions as part of the income tax provision. As of December 31, 2021 and 2020, such interest and penalties were not material.

The Company is subject to taxation in the United States, California, and several foreign jurisdictions. To date, the Company has not been subject to any federal or state income tax audits. The Company is currently under examination by the Israeli taxing authorities for 2018 and 2019. As of December 31, 2021 all tax years remain open to examination.