NOTE 15. INCOME TAXES

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


	2017		2016		2015
Current:
Federal	$	384	$	1,087	$	(1,679)
State		(1,813)		140		160
	$	(1,429)	$	1,227	$	(1,519)
Deferred:
Federal	$	—	$	16,291	$	(39,459)
State		—		6,700		(6,521)
		—		22,991		(45,980)
Total (benefit) provision for income taxes	$	(1,429)	$	24,218	$	(47,499)

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):


	2017		2016		2015
Tax at federal statutory rate	$	(36,374)	$	(22,580)	$	(43,133)
State tax, net of federal benefit		71		(748)		(2,615)
Research credit		(41)		(902)		(438)
Stock based compensation		159		1,435		848
Non-deductible meals and entertainment		973		955		729
Non-deductible other expense		6,508		1,426		846
Change in valuation allowance		1,326		44,632		(3,736)
Uncertain tax provisions		(1,611)		—		—
Tax rate changes		27,560		—		—
Total	$	(1,429)	$	24,218	$	(47,499)

During 2017, the Company provided for income tax benefit of approximately $1.4 million principally due to release of liability and accrued interest and penalties associated with uncertain tax positions due to the lapse of the State statute of limitations.

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

During 2015, the Company recognized an income tax benefit of approximately $47.5 million.

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. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the deferred tax re-measurements to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.

As of December 31, 2017, the Company had net operating loss carry forwards for federal income tax purposes of approximately $33.5 million, which begin to expire in 2020. Net operating loss carryforwards for state income tax purposes were approximately $136.1 million, which begin to expire in 2018. The Company had federal and California state research and development credit carryforwards of $1.8 million and $2.4 million, respectively. The federal research and development credit will begin to expire in 2032 and 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):


	2017		2016
Deferred tax assets:
Net operating losses	$	16,391	$	6,810
Tax credit carryforwards		1,860		1,452
Intangibles		38,509		46,364
Stock-based compensation		1,505		4,992
Reserves and other accruals not currently deductible		12,094		17,294
Total deferred tax assets		70,359		76,912
Valuation allowance for deferred tax assets		(54,224)		(45,206)
	$	16,135	$	31,706
Deferred tax liabilities
Convertible debt	$	(16,135)	$	(31,706)
Net deferred tax asset (liability)	$	-	$	-

In 2017, the Company recorded a valuation allowance of $54.2 million to offset, in full, the benefit related to its net deferred tax assets as of December 31, 2017 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 increased by $9.0 million, increased by $44.6 million, and decreased by $3.7 million during the years ended December 31, 2017, 2016 and 2015 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 2016 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, 2017, the Company had approximately $0.8 million of accrued interest and penalties associated with any unrecognized tax benefits.

The following table summarizes the activity related to our unrecognized tax benefits for the three years ended December 31, 2017 (in thousands):



Unrecognized tax benefits—January 1, 2015	$	5,179
Gross increases—current year tax positions		454
Gross increases—prior year tax positions		53
Unrecognized tax benefits—December 31, 2015		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 increases—prior year tax positions		(966)
Unrecognized tax benefits— December 31, 2017	$	17,144

The total amount of unrecognized tax benefit that would affect the effective tax rate is approximately $10.8 million as of December 31, 2017 and $12.2 million as of December 31, 2016.

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.