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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes 9. 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,

 

 

 

2022

 

 

2021

 

89bio, Inc.

 

 

21

%

 

 

21

%

89Bio Ltd.

 

 

23

%

 

 

23

%

89bio Management, Inc.

 

 

21

%

 

 

21

%

UAB 89bio Lithuania

 

 

15

%

 

 

15

%

The income tax (expense) benefit for the periods presented is comprised of (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2022

 

 

2021

 

Current:

 

 

 

 

 

 

Federal

 

—

 

 

—

 

State

 

 

(3

)

 

 

(2

)

Foreign

 

 

(16

)

 

 

(1

)

Total

 

 

(19

)

 

 

(3

)

Deferred:

 

 

 

 

 

 

Federal

 

—

 

 

 

150

 

State

 

—

 

 

—

 

Foreign

 

—

 

 

—

 

Total

 

—

 

 

 

150

 

Income tax (expense) benefit

 

 

(19

)

 

 

147

 

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,

 

 

 

2022

 

 

2021

 

U.S. net operating loss carryforwards

 

$

45,002

 

 

$

29,094

 

Research and development expenses

 

 

18,927

 

 

 

6,529

 

Israel net operating loss carryforwards

 

 

7,385

 

 

 

4,262

 

Stock-based compensation

 

 

4,328

 

 

 

1,969

 

Accrued expenses

 

 

317

 

 

 

220

 

Operating Lease Liability

 

 

98

 

 

 

—

 

Other

 

 

244

 

 

 

191

 

Gross deferred tax assets

 

 

76,301

 

 

 

42,265

 

Less: valuation allowance

 

 

(75,982

)

 

 

(42,046

)

 Total deferred tax assets

 

$

319

 

 

$

219

 

 

 

 

 

 

 

 

Operating lease right-of-use asset

 

 

(100

)

 

 

—

 

Total deferred tax liabilities

 

 

(100

)

 

 

—

 

 Net deferred tax assets

 

 

219

 

 

 

219

 

As of December 31, 2022 and 2021, the Company recorded a valuation allowance of $76.0 million and $42.0 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 $34.0 million in 2022, 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.

Available Carryforward Tax Losses and Credits

As of December 31, 2022, the Company had an accumulated tax loss carryforward of approximately $160.9 million, $169.8 million, and $32.1 million for Federal, State and Israeli tax purposes, respectively. 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. 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 California will begin to expire in 2041. Carryforward tax losses in Israel have no expiration date.

As of December 31, 2022 and 2021, the Company had federal research and development credit carryforwards of approximately $4.3 million and $2.1 million, respectively, which expire beginning in 2040. As of December 31, 2022 and December 31, 2021, the Company had state research and development credit carryforwards of approximately $1.8 million and $1.1 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,

 

 

 

2022

 

 

2021

 

United States

 

$

(101,938

)

 

$

(91,141

)

Lithuania

 

 

(7

)

 

 

10

 

Israel

 

 

(62

)

 

 

862

 

Net loss before income tax

 

$

(102,007

)

 

$

(90,269

)

Reconciliation of Income Tax (Expense) Benefit

The reconciliation of income tax (expense) 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,

 

 

 

2022

 

 

2021

 

Income tax benefit computed at statutory rates

 

$

21,429

 

 

$

18,757

 

Change in valuation allowance

 

 

(33,936

)

 

 

(20,111

)

Foreign rate differential

 

 

1

 

 

 

(19

)

State income taxes, net of federal benefit

 

 

5,824

 

 

 

—

 

State deferred tax true-up due to change in apportionment

 

 

6,517

 

 

 

—

 

Change in Israel effective tax rate due to the 2019 reorganization

 

 

—

 

 

 

(2

)

Research and development credits, net of uncertain tax position

 

 

2,130

 

 

 

1,331

 

Other

 

 

(1,984

)

 

 

191

 

Income tax (expense) benefit

 

$

(19

)

 

$

147

 

 

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

A reconciliation of the unrecognized tax benefits for the year ended December 31, 2022 and 2021 is as follows (in thousands):

 

 

 

As of December 31,

 

 

 

2022

 

 

2021

 

Balance beginning of year

 

 

851

 

 

 

329

 

Decrease related to prior year positions

 

 

(19

)

 

 

(35

)

Increase related to current year positions

 

 

752

 

 

 

557

 

 Balance end of year

 

 

1,584

 

 

 

851

 

During the year ended December 31, 2022 and 2021, the amount of gross unrecognized tax benefits increased by $0.7 million and $0.5 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, 2022 and 2021, such interest and penalties were not material.

The Company is subject to taxation in the United States, California, Colorado, North Carolina 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 tax authorities for 2018 and 2019. As of December 31, 2022, all tax years remain open to examination.

On August 9, 2022 and August 16, 2022, the Creating Helpful Incentives to Produce Semiconductors (“CHIPS”) Act and the Inflation Reduction Act (“IRA”), respectively, were signed into law. The CHIPS Act and IRA contain among other things, some income tax provisions that establish a corporate alternative minimum tax and provide tax incentives for semiconductor manufacturing and research. The Company has evaluated the current legislation and at this time, does not anticipate either to have a material impact on its financial statements.

The Tax Cuts and Jobs Act (“TCJA”) included a change in the treatment of research and development (“R&D”) expenditures for tax purposes under Section 174. Effective for tax years beginning after December 31, 2021, specified R&D expenditures must undergo a 5-year amortization period for domestic spend and a 15-year amortization period for foreign spend. Prior to the effective date (2021 tax year and prior), taxpayers were able to immediately expense R&D costs under Section 174(a) or had the option to capitalize and amortize R&D expenditures over a 5-year recovery period under Section 174(b). The Company has evaluated the current legislation at this time and prepared the provision by following the treatment of R&D expenditures for tax purposes under Section 174.