NOTE 10 – INCOME TAXES

The benefit for income taxes consisted of the following (in thousands):

	Year Ended December 31,
	2017		2016			2015
Benefit for income taxes:
Current:
Federal	$	—	$	—		$	—
State		—		—			—
Subtotal		—		—			—
Deferred:
Federal	$	—	$	(12	)	$	(5,563	)
State		—		(2	)		(159	)
Subtotal		—		(14	)		(5,722	)
Income tax benefit	$	—	$	(14	)	$	(5,722	)

The difference between the benefit for income taxes and the amount computed by applying the federal statutory income tax rate (34%) to loss before taxes is explained as follows (in thousands):

	Year Ended December 31,
	2017			2016			2015
Tax at federal statutory rate	$	(18,553	)	$	(24,369	)	$	(15,785	)
State taxes, net		795			(747	)		4,840
Federal Rate Change		53,045			—			—
Non-deductible stock compensation		2,120			2,781			1,085
Research credits		(869	)		(1,424	)		(814	)
Change in valuation allowance		(36,575	)		23,773			5,043
Other		37			(28	)		(91	)
Income tax benefit	$	—		$	(14	)	$	(5,722	)

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 are as follows (in thousands):

	December 31 ,
	2017		2016
Assets:
Deferred tax assets:
Net operating loss carryforwards	$	91,308	$	114,222
Research and development tax credit carryforwards		15,147		12,518
Stock-based compensation		3,168		8,565
Deferred revenue		934		2,918
Other		2,276		3,492
Total deferred tax asset		112,833		141,715
Valuation allowance		112,833		141,715
Net deferred tax assets	$	—	$	—
Liabilities:
Net deferred tax liability related to intangible assets		—		—
Total deferred tax liability	$	—	$	—

In October 2013, we acquired Ceregene. The Company recorded goodwill and intangible assets as part of accounting for the acquisition of Ceregene. A portion of the intangible assets acquired were for the use in a particular research and development project IPR&D and are considered indefinite-lived assets with no tax basis. In 2015, the Company impaired these intangible assets and reversed the corresponding deferred tax liability.

In 2015 the Company received a $14.5 million Section 16(b) disgorgement settlement that was recognized as additional paid-in capital. The disgorgement settlement was recognized net of taxes of $9.5 million, which resulted in an income tax benefit of $5.0 million being recognized in the accompanying consolidated statements of operations for the year ended December 31, 2015.

The changes in the fair value of the unrealized gain/loss on securities investment are recorded as a component of accumulated other comprehensive income, net of a provision for income taxes.

A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. We regularly assess the need for a valuation allowance against our deferred income tax assets by considering both positive and negative evidence related to whether it is more likely than not that our deferred income tax assets will be realized. In evaluating our ability to recover our deferred income tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred income tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. Accordingly, based upon the Company’s analysis of these factors the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance (decreased) increased by $(28.9) million, $23.8 million and $5.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, Sangamo had net operating loss carryforwards for federal and state income tax purposes of approximately $475 million and $142 million, respectively. If not utilized, the net federal and state operating loss carryforwards will expire in 2018 and 2017, respectively. The Company also has federal and state research tax credit carryforwards of $10.8 million and $11.8 million, respectively. The federal research credits will begin to expire in 2018 while the state research credits have no expiration date. Utilization of the Company’s net operating loss carryforwards and research tax credit carryforwards may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation could result in the expiration of the net operating loss carryforwards and research tax credit carryforwards before utilization.

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act ("Tax Reform") into legislation. The Tax Reform makes significant changes to the US corporate income tax law including, but not limited to, (1) reducing the U.S. federal corporate tax rate to 21% from 35% and (2) requiring a one-time mandatory transition tax on previously deferred foreign earnings of US subsidiaries. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. In the case of US federal income taxes, the enactment date is the date the bill becomes law. With respect to this legislation, we expect no financial statement impact due to the Company's valuation allowance. The Company performed a re-measurement of deferred tax assets and liabilities as a result of the decrease in the corporate Federal income tax rate from 35% to 21%. In addition to the reduction of U.S. federal corporate tax rate, the Company has also considered the impact of the foreign transition tax for which it has estimated that it would not need to accrue any amounts.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.118 (SAB 118) to provide guidance on the application of the Tax Reform when a company does not have the necessary information available, prepared, or analyzed in reasonable to detail to reflect the effects of the Tax Reform. SAB 118 provides guidance for companies under the three scenarios (1) measurement of certain income tax effects is complete, (2) measurement of certain income tax effect can be reasonably estimated, and (3) measurement of certain income tax effects cannot be reasonably estimated. Companies are to complete the accounting under ASC 740 in regards to the Tax Reform within a measurement period that does not extend one year from the date of enactment (i.e., December 22, 2018). In accordance with SAB 118, companies must reflect the tax effects of the Tax Reform for which the accounting under 740 is complete. If certain income tax effect can be reasonably estimated, then the companies must report provisional amounts in the reporting period in which the companies can determine the reasonable estimate during the measurement period. In the case that certain income tax effects cannot be reasonably estimated, companies do not have to report effects of the Tax Reform. However, they should continue to apply ASC 740 based on the rules before the enactment of the Tax Reform and report any income tax effects in the first reporting period in which reasonable estimates become available.

We expect the new law to significantly reduce our tax rate in future periods, and our tax footnote reflects the effects of a Federal tax rate reduction net of our valuation allowance, which resulted in a net overall reduction of $0.

The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. In accordance with SAB 118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by year ending December 31, 2018.

The Company files federal and state income tax returns with varying statutes of limitations. The tax years from 2002 forward remain open to examination due to the carryover of net operating losses or tax credits. The Company also files a UK income tax return, and the tax years from 2008 and thereafter remain open to examination.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2017, the Company had no accrued interest and/or penalties. The unrecognized tax benefits may change during the next year for items that arise in the ordinary course of business. In the event that any unrecognized tax benefits are recognized, the effective tax rate will not be affected.

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):

	December 31,
	2017			2016			2015
Beginning balance	$	5,045		$	8,330		$	3,438
Additions based on tax positions related to the current year		622			1,023			557
Additions for tax positions of prior years		(8	)		27			4,335
Reductions for tax positions of prior years		—			(4,335	)		—
Ending balance	$	5,659		$	5,045		$	8,330