Income Taxes

12 Months Ended

Dec. 31, 2019

Income (loss) before provision for income taxes includes the following components (in thousands):



	Year Ended December 31,
	2019			2018		2017
Domestic	$	(441,494	)	$	680,423	$	(97,938	)
Foreign	1,440			2,302		1,862
Income (loss) before provision for income taxes	$	(440,054	)	$	682,725	$	(96,076	)

Provision for Income Taxes

The provision for income taxes consists of the following (in thousands):



	Year Ended December 31,
	2019			2018		2017
Current:
Federal	$	—		$	—	$	—
State	139			699		1
Foreign	495			620		580
Total Current	634			1,319		581
Deferred:
Federal	—			—		—
State	—			—		—
Foreign	(21		)	93		35
Total Deferred	(21		)	93		35
Provision for income taxes	$	613		$	1,412	$	616

Income tax provision related to continuing operations differs from the amount computed by applying the statutory income tax rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017 to pretax income (loss) as follows (in thousands):



	Year Ended December 31,
	2019			2018			2017
Income tax expense (benefit) at federal statutory rate	$	(92,411	)	$	143,372		$	(33,627	)
Research credits	(10,511		)	(17,295		)	(8,038		)
Sale of future royalties	(7,624		)	(6,995		)	(8,236		)
Stock-based compensation	(672		)	(66,716		)	(20,665		)
Premium on equity issuance	—			(12,551		)	—
Change in valuation allowance	104,440			(46,885		)	(186,124		)
Non-cash interest expense on liability related to sale of future royalties	5,259			4,451			6,604
Non-deductible officers’ compensation	737			3,182			2,547
Tax law changes	23			45			248,155
Other	1,372			804			—
Provision for income taxes	$	613		$	1,412		$	616

Tax Law Changes

The U.S. Tax Cuts and Jobs Act (the TCJA) was enacted on December 22, 2017. The TCJA reduced the U.S. federal corporate tax rate from 35% in 2017 to 21% in 2018, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. At December 31, 2018, we completed our accounting for the tax effects of the TCJA, which, other than the decrease in the valuation of our federal deferred tax assets discussed below, did not have a material effect on our Consolidated Financial Statements.

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. Significant components of our deferred tax assets for federal and state income taxes are as follows (in thousands):



	December 31,
	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	399,361		$	300,693
Research and other credits	128,015			116,955
Operating lease liabilities	36,907			—
Stock-based compensation	30,875			21,518
Property, plant and equipment	5,021			2,124
Capitalized research expenses	3,705			8,072
Reserves and accruals	2,934			8,066
Deferred revenue	1,908			4,467
Deferred tax assets before valuation allowance	608,726			461,895
Valuation allowance for deferred tax assets	(575,087		)	(460,455		)
Total deferred tax assets	33,639			1,440
Operating lease right-of-use assets	(31,718		)	—
Other	(1,725		)	(1,270		)
Total deferred tax liabilities	(33,443		)	(1,270		)
Net deferred tax assets	$	196		$	170

Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of our lack of U.S. earnings history, other than income resulting from revenue recognized from the BMS Collaboration Agreement, and projected future losses, we have fully reserved our net U.S. deferred tax assets with a valuation allowance. The valuation allowance increased by $114.6 million during the year ended December 31, 2019 due to our net loss and decreased by $35.7 million and $169.3 million during the years ended December 31, 2018 and 2017, respectively. The decrease in the valuation allowance for the year ended December 31, 2018 reflects the utilization of net operating loss carryforwards to offset federal and state taxable income, and the decrease in the valuation allowance for the year ended December 31, 2017 primarily reflects the change in the federal rate. The valuation allowance includes approximately $35.6 million of income tax benefit at both December 31, 2019 and December 31, 2018 related to stock-based compensation that will be included in income tax expense in our Consolidated Statement of Operations when realized.

For 2017, the one-time transition tax under the TCJA was based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We concluded that there was negative E&P on an aggregate basis and we did not record any amount for any one-time transition tax triggered by the Tax Act. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2019, we had a net operating loss carryforward for federal income tax purposes of approximately $1,721.7 million, portions of which will begin to expire in 2022. As of December 31, 2019, we had a total state net operating loss carryforward of approximately $1,221.3 million, portions of which will begin to expire in 2026. Utilization of some of the federal and state net operating loss and credit carryforwards are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions.

We have federal research credits of approximately $94.8 million, which will begin to expire in 2020 and state research credits of approximately $49.4 million which have no expiration date. We have federal orphan drug credits of $17.7 million which will begin to expire in 2026. These tax credits are subject to the same limitations discussed above.

Unrecognized tax benefits

With the exception of net income recognized in 2018, we have incurred net operating losses since inception. Our policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for income taxes in the consolidated statements of operations. If we are eventually able to recognize our uncertain positions, our effective tax rate may be reduced. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Adjustments to the substantial majority of our uncertain tax positions would result in an adjustment of our net operating loss or tax credit carry forwards rather than resulting in a cash outlay.

We file income tax returns in the U.S., California, Alabama, certain other states and India. Because of net operating losses and research credit carryovers, substantially all of our domestic tax years remain open and subject to examination. We are currently under examination in India for the fiscal years ending 2009, 2016, 2017 and 2018.

We have the following activity relating to unrecognized tax benefits (in thousands):



	December 31,
	2019			2018		2017
Beginning balance	$	27,419		$	20,483	$	18,413
Tax positions related to current year
Additions:
Federal	1,365			2,019		1,206
State	48,493			3,645		1,666
Reductions	—			—		—
Tax positions related to prior year
Additions:
Federal	—			669		—
State	277			603		—
Foreign	—			—		—
Reductions	(144		)	—		(802		)
Settlements	—			—		—
Lapses in statute of limitations	—			—		—
Ending balance	$	77,410		$	27,419	$	20,483

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months, we do not anticipate any significant changes to unrecognized tax benefits over the next twelve months. During the years ended December 31, 2019, 2018 and 2017, no significant interest or penalties were recognized relating to unrecognized tax benefits.