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Income Taxes
 9 Months Ended
Sep. 30, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

8. Income Taxes

 

The provision for income taxes for interim periods is determined using an estimated annual effective tax rate in accordance with ASC 740-270, Income Taxes, Interim Reporting. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where Oncocyte conducts business.

 

In connection with the Chronix and Razor acquisitions discussed in Note 3, a change in the acquirer’s valuation allowance that stems from the purchase of assets should be recognized as an element of the acquirer’s income tax benefit in the period of the acquisition. Accordingly, for the nine months ended September 30, 2021, Oncocyte recorded a $9.4 million partial release of its valuation allowance and a corresponding income tax benefit stemming from the estimated DTLs generated by the Razor intangible asset and Chronix IPR&D we acquired.

 

In connection with the Insight Merger discussed in Note 3 and in accordance with ASC 805, a change in the acquirer’s valuation allowance that stems from a business combination should be recognized as an element of the acquirer’s income tax expense or benefit in the period of the acquisition. Accordingly, for the nine months ended September 30, 2020, Oncocyte recorded a $1.1 million partial release of its valuation allowance and a corresponding income tax benefit stemming from the DTLs generated by the IPR&D and customer relationships intangible assets acquired in the Insight Merger.

 

Oncocyte did not record any provision or benefit for income taxes for the three months ended September 30, 2020, as Oncocyte had a full valuation allowance for the periods presented.

 

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Other than the partial releases discussed above, Oncocyte established a full valuation allowance for all periods presented due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets.

 

During the three months ended September 30, 2021, Oncocyte received approval of its petition for alternative apportionment in California by the California Franchise Tax Board. As a result, Oncocyte has derecognized its uncertain tax position of $2.2 million discretely in the current quarter. There will be no financial statement impact as the uncertain tax positions were previously offset against Oncocyte’s California Net Operating Losses, which would otherwise have a full valuation allowance.