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Income Taxes | 12 Months Ended
--- | ---
Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The Company’s loss before income taxes was entirely generated from its U.S. operations. The current and deferred expense is as follows (in thousands):
| Year Ended December 31,
| 2018 |  | 2017
Current provision: |  |  |
Federal | $ | — |  |  | $ | (775 | )
State | — |  |  | (221 | )
Total current benefit | — |  |  | (996 | )
Deferred (benefit) provision: |  |  |
Federal | 44 |  |  | (6,276 | )
State | 21 |  |  | 21 |
Total deferred provision (benefit) | 65 |  |  | (6,255 | )
Total provision (benefit) for income taxes | $ | 65 |  |  | $ | (7,251 | )
As of December 31, 2018 and 2017, the Company has federal and state net operating loss (“NOL”) carryforwards of $99.8 million and $72.6 million, respectively, which will begin to expire in year 2034. NOL carryforwards generated by the Company have been included in the consolidated and unitary income tax returns of ALPHAEON. As of December 31, 2018 and 2017, the Company has federal research and development (“R&D”) credit carryforwards of $1.2 million and $1.0 million, respectively, which will begin to expire in 2034. The Company also has California R&D credit carryforwards of $1.2 million and $1.1 million, respectively, which has an indefinite carryforward period. Deferred tax assets in the accompanying financial statements are presented as if the Company filed separate income tax returns. Accordingly, the NOL and the R&D credit carryforwards allocable to the Company based on ALPHAEON’s consolidated and unitary income tax returns may ultimately differ from those presented in the financial statements on a separate return methodology. In general, if the Company experiences a greater than 50 percentage point aggregate change in ownership of certain significant stockholders over a three-year period (a “Section 382 ownership change”), utilization of its pre-change NOL carryforwards and the R&D credit carryforwards is subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state laws. The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change, subject to certain adjustments, by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards and R&D credit carryforwards before utilization and may be material. As of December 31, 2018, the Company has not determined to what extent a potential ownership change will impact the annual limitation that may be placed on the Company’s utilization of its NOL carryovers and R&D credit carryforwards. The components of deferred tax assets and liabilities were as follows (in thousands):
| As of December 31,
| 2018 |  | 2017
Deferred income tax assets: |  |  |
Net operating losses | $ | 29,782 |  |  | $ | 21,657 |
Promissory note - debt discount | 108 |  |  | — |
Accrued compensation | 648 |  |  | — |
Stock compensation | 1,552 |  |  | 292 |
Research and development credit carryforwards | 2,436 |  |  | 2,109 |
Deferred rent | 7 |  |  | 11 |
Intangible asset | 3 |  |  | 3 |
Valuation allowance | (34,536 | ) |  | (24,072 | )
Total deferred income tax assets | — |  |  | — |
Deferred income tax liabilities: |  |  |
Intangible amortization | (15,055 | ) |  | (14,990 | )
Total deferred income tax liabilities | (15,055 | ) |  | (14,990 | )
Net deferred income taxes | $ | (15,055 | ) |  | $ | (14,990 | )
The Company recorded deferred tax assets of $34.5 million and $24.1 million as of December 31, 2018 and 2017, respectively, which have been fully offset by a valuation allowance. The valuation allowance increased by $10.5 million during 2018 primarily driven by the current year operating loss. A reconciliation of the difference between the provision (benefit) for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows (in thousands):
| As of December 31,
| 2018 |  | 2017
Income tax at statutory rate | $ | (9,828 | ) |  | $ | (3,988 | )
State income taxes, net of Federal benefit | 16 |  |  | (132 | )
Research and development tax credit | (175 | ) |  | (145 | )
Change in Federal tax rate due to tax reform | — |  |  | 3,221 |
Stock compensation | 416 |  |  | 338 |
Promissory note - debt discount | 105 |  |  | — |
Revaluation of contingent royalty obligation | 2,205 |  |  | — |
Meals and entertainment | 17 |  |  | 3 |
Valuation allowance | 7,309 |  |  | (6,548 | )
Income tax provision (benefit) | $ | 65 |  |  | $ | (7,251 | )
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| As of December 31,
| 2018 |  | 2017
Beginning balance | $ | 2,109 |  |  | $ | 1,812 |
Increases to current year tax positions | 326 |  |  | 297 |
Ending balance | $ | 2,435 |  |  | $ | 2,109 |
The Company has considered the amounts and probabilities of the outcomes that can be realized upon ultimate settlement with the tax authorities and determined unrecognized tax benefits primarily related to credits should be established as noted in the summary rollforward above. The Company’s effective income tax rate would not be impacted if the unrecognized tax benefits are recognized. Additional amounts in the summary rollforward could impact the Company’s effective tax rate if it did not maintain a full valuation allowance on its net deferred tax assets. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2018 and 2017. The Company’s tax returns for all years since inception are open for audit. In December 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted. The TCJA includes a number of changes to existing U.S. tax laws that impact the company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The TCJA also provides for the acceleration of depreciation for certain assets placed in service after September 27, 2017 as well as prospective changes beginning in 2018, including additional limitations on executive compensation, limitations on the deductibility of interest and capitalization of research and development expenditures. The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. While there were no changes in the net deferred tax assets, the Company has recorded a decrease in the valuation allowance of $9.6 million, and a reduction in the net deferred tax liability and a benefit to income tax expense of $6.3 million for the year ended December 31, 2017. The TCJA no longer allows deductions for compensation in excess of $1 million for certain employees, even if paid as commissions or performance based compensation. It also subjects the principal executive officer, principal financial officer and three other highest paid officers to the limitation and once the individual becomes a covered person, the individual will remain a covered person for all future years. The company recognized the income tax effects of the TCJA in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the TCJA was signed into law. As such, the Company's 2017 financial results reflected the provisional income tax effects of the TCJA for which the accounting was incomplete but a reasonable estimate was made. The Company’s accounting for the elements of the TCJA was complete as of December 31, 2018 and no adjustments were made to the original provisional estimate.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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