INCOME TAXES

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



Current:	2018		2017			2016
Federal	$	896	$	384		$	1,087
State	171		(1,813		)	140
	$	1,067	$	(1,429	)	$	1,227
Deferred:
Federal	$	—	$	—		$	16,291
State	—		—			6,700
	—		—			22,991
Total (benefit) provision for income taxes	$	1,067	$	(1,429	)	$	24,218

A reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate included in the statements of operations is as follows (in thousands):



	2018			2017			2016
Tax at federal statutory rate	$	7,975		$	(36,374	)	$	(22,580	)
State tax, net of federal benefit	192			71			(748		)
Research credit	(41		)	(41		)	(902		)
Stock based compensation	1,259			159			1,435
Non-deductible meals and entertainment	223			973			955
Non-deductible other expense	308			6,508			1,426
Change in valuation allowance	(9,233		)	1,326			44,632
Uncertain tax provisions	384			(1,611		)	—
Tax rate changes	—			27,560			—
Total	$	1,067		$	(1,429	)	$	24,218

During 2018, the Company recorded income tax expense of approximately $1.1 million principally due to the increase in book income from Purdue litigation settlement.

During 2017, the Company recognized a tax benefit of approximately $1.4 million principally due to release of liability and accrued interest and penalties associated with uncertain tax

During 2016, the Company recorded income tax expense of approximately $24.2 million principally due to the recording of a full valuation allowance against its deferred tax assets.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the Tax Act). The Tax Act includes significant changes to the U.S. corporate income tax system including, but not limited to, a federal corporate rate reduction from 35% to 21% and limitations on the deductibility of interest expense and executive compensation. In order to calculate the effects of the new corporate tax rate on our deferred tax balances, ASC 740 Income Taxes (ASC 740) required the re-measurement of our deferred tax balances as of the enactment date of the Tax Act, based on the rates at which the balances were expected to reverse in the future. Due to the Company’s full valuation allowance position, there is no change to the presentation of the deferred tax balances on the financial statements, except for the re-measurement of these deferred tax balances in the income tax footnote. The re-measurement resulted in a one-time reduction in federal & state deferred tax assets of approximately $25.5 million, which was fully offset by a corresponding change to the Company’s valuation allowance. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 31, 2018, we completed our accounting for all tax effects related to the Tax Act, and there were no material adjustments recorded during the year to the previously recorded provisional amounts reflected in our 2017 financial statements.

As of December 31, 2018, the Company had net operating loss carry forwards for federal income tax purposes of approximately $4.9 million, which begin to expire in 2021. Net operating loss carryforwards for state income tax purposes were approximately $89.7 million, which begin to expire in 2018. The Company had federal and California state research and development credit carryforwards of $0.0 million and $2.6 million, respectively. The California state research and development credit has no expiration.

Utilization of the Company’s net operating loss and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Deferred income taxes reflect the 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):



	2018			2017
Deferred tax assets:
Net operating losses	$	6,618		$	16,391
Tax credit carryforwards	1,096			1,860
Intangibles	33,604			38,509
Stock-based compensation	2,286			1,505
Reserves and other accruals not currently deductible	10,706			12,094
Total deferred tax assets	54,310			70,359
Valuation allowance for deferred tax assets	(41,905		)	(54,224		)
	$	12,405		$	16,135
Deferred tax liabilities
Convertible debt	$	(12,213	)	$	(16,135	)
Fixed Assets	(192		)	—
Net deferred tax asset (liability)	—			—

In 2018, the Company recorded a valuation allowance of $41.9 million to offset, in full, the benefit related to its net deferred tax assets as of December 31, 2018 because realization of the future benefits is uncertain. The Company reviewed both positive evidence such as, but not limited to, the projected availability of future taxable income and negative evidence such as the history of cumulative losses in recent years. The Company will continue to assess the realizability of its deferred tax assets on a quarterly basis, and assess whether an additional reserve or a release of the valuation allowance is required in future periods.

The valuation allowance decreased by $12.3 million, increased by $9.0 million, and increased by $44.6 million during the years ended December 31, 2018, 2017 and 2016 respectively.

The Company files income tax returns in the United States federal jurisdiction and in various states, and the tax returns filed for the years 1997 through 2017 and the applicable statutes of limitation have not expired with respect to those returns. Because of net operating losses and unutilized R&D credits, substantially all of the Company’s tax years remain open to examination.

Interest and penalties, if any, related to unrecognized tax benefits would be recognized as income tax expense by the Company. At December 31, 2018, the Company had approximately $1.4 million of accrued interest and penalties associated with any unrecognized tax benefits.

The following table summarizes the activity related to the Company’s unrecognized tax benefits for the three years ended December 31, 2018 (in thousands):



Unrecognized tax benefits—January 1, 2016	$	5,686
Gross increases—current year tax positions	240
Gross increases—prior year tax positions	8,761
Unrecognized tax benefits—December 31, 2016	14,687
Gross increases—current year tax positions	3,423
Gross decreases—prior year tax positions	(966		)
Unrecognized tax benefits—December 31, 2017	17,144
Gross increases—current year tax positions	262
Gross decreases—prior year tax positions	(1,342		)
Unrecognized tax benefits—December 31, 2018	$	16,064

The total amount of unrecognized tax benefit that would affect the effective tax rate is approximately $16.1 million as of December 31, 2018 and $17.1 million as of December 31, 2017. The Company has recorded an other asset of $5.3 million related to tax benefits that would be realized in 2018 if all uncertain tax positions were assessed.

The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next year for items that arise in the ordinary course of business.