9. Income Taxes

2017 U.S. Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into United States law. The TCJA includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective as of January 1, 2018, as well as a limitation of the deduction for net operating losses to 80% of annual taxable income and the elimination of net operating loss carrybacks, in each case, for the Company’s losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). The federal tax rate change resulted in a reduction of the Company’s deferred tax assets and liabilities, and a corresponding reduction to its valuation allowance. As a result, no income tax expense or benefit was recognized as of the enactment date of the TCJA. The other provisions of the TCJA did not have a material impact on the financial statements.

Income Taxes

The Company had no income tax expense for the years ended December 31, 2018 or 2017. The Company has no foreign operations and therefore, has not provided for any foreign taxes. A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:


	Year Ended December 31,
	2018			2017
Federal statutory income tax rate		21.0	%		34.0	%
State taxes, net of federal benefit		6.1			3.0
Federal and state research and development tax credits		9.6			13.7
Nondeductible items		(0.8	)		(1.7	)
2017 TCJA		—			(26.9	)
Stock-based compensation		4.4			(2.6	)
Other		0.2			0.3
Change in valuation allowance		(40.5	)		(19.8	)

Effective income tax rate		—	%		—	%

Net deferred tax assets as of December 31, 2018 and 2017 consisted of the following (in thousands):


	December 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	5,691		$	2,363
Research and development tax credit carryforwards		3,772			2,501
Accrued expenses and other current liabilities		501			392
Intangible assets		38			42
Property and equipment		150			111
Stock-based compensation		1,479			265
Other		382			259

Total deferred tax assets		12,013			5,933
Valuation allowance		(11,257	)		(5,677	)

Net deferred tax assets		756			256

Deferred tax liabilities:
Capitalized software development costs		(756	)		(256	)

Deferred tax liabilities		(756	)		(256	)


Net deferred tax assets and liabilities	$	—		$	—

As of December 31, 2018, the Company had federal net operating loss carryforwards of $21.6 million, which may be available to offset future taxable income, of which $9.0 million of the total net operating loss carryforwards expire at various dates beginning in 2029, while the remaining $12.6 million do not expire but are limited in their usage to an annual deduction equal to 80% of annual taxable income. As of December 31, 2018, the Company had state net operating loss carryforwards of $18.2 million, which may be available to offset future taxable income and expire at various dates beginning in 2027. As of December 31, 2018, the Company also had federal and state research and development tax credit carryforwards of $2.7 million and $1.4 million, respectively, which may be available to reduce future tax liabilities and expire at various dates beginning in 2030 and 2029, respectively.

Utilization of the U.S. federal and state net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 and Section 383 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income and tax liabilities. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards may be subject to an annual limitation, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which are comprised primarily of net operating loss carryforwards and research and development tax credit carryforwards. Management has considered the Company’s history of cumulative net losses incurred since inception, estimated future taxable income and prudent and feasible tax planning strategies and has concluded that it is more likely than not that the Company will not realize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of December 31, 2018 and 2017. The Company reevaluates the positive and negative evidence at each reporting period.

The change in the valuation allowance for deferred tax assets during the year ended December 31, 2018 related primarily to an increase in net operating loss carryforwards, research and development tax credit carryforwards and stock-based compensation expense. The change in the valuation allowance during the year ended December 31, 2017 related primarily to an increase in net operating loss carryforwards and research and development tax credit carryforwards, which was partially offset by a decrease in deferred tax assets resulting from the change in our federal tax rate from 34% to 21%, effective January 1, 2018. The changes in the valuation allowance for 2018 and 2017 were as follows (in thousands):


	Year Ended December 31,
	2018		2017
Valuation allowance as of beginning of year	$	5,677	$	3,795
Increases recorded to accumulated deficit (adoption of ASU 2016-09)		—		876
Decreases recorded as a benefit to income tax provision		—		(1,368	)
Increases recorded to tax provision		5,580		2,374

Valuation allowance as of end of year	$	11,257	$	5,677

The Company assesses the uncertainty in its income tax positions to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more-likely-than-not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority. No reserve for uncertain tax positions or related interest and penalties has been recorded at December 31, 2018 and 2017.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company is open to future tax examination under statute from 2015 to the present, however, carryforward attributes that were generated prior to January 1, 2015 may still be adjusted upon examination by federal, state or local tax authorities if they either have been or will be used in a future period.