13. Income Taxes

For the years ended December 31, 2018 and 2017, the Company did not record a provision for federal or state income taxes as it has incurred cumulative net operating losses since inception.

On December 22, 2017, the Tax Cuts and Jobs Act (the “ Tax Act”) was enacted in the United States. The Tax Act reduces the U.S. federal corporate tax rate from a graduated rate of 35% to a flat rate of 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The Company does not currently have any foreign subsidiaries and the international aspects of the Tax Act are not applicable.

In connection with the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company's deferred tax balance was primarily offset by application of its valuation allowance. As of December 31, 2018, the Company has completed its accounting for all of the tax effects of the enactment of the Tax Act, including the effects on its existing deferred tax balances. The Company has not recognized any material adjustment to the provisional estimate that was previously recorded related to the Tax Act.

A reconciliation of the U.S. statutory income tax rate to the Company's effective tax rate is as follows for the years ended December 31, 2018 and 2017:


	Year Ended December 31,
	2018		2017
Federal income tax (benefit) at statutory rate	21.00	%	34.00	%
Permanent differences	(0.68)		(1.16)
Federal research and development credits and adjustments	4.25		2.36
State income tax, net of federal benefit	6.84		5.80
Tax reform deferred rate change	—		(72.21)
Other	(1.41)		(0.36)
Change in valuation allowance	(30.00)		31.57
Effective income tax rate	—	%	—	%

The Company's deferred tax assets consisted of the following (in thousands):



	Year Ended December 31,
	2018		2017
Deferred tax assets
Net operating loss carryforwards	$	48,107	$	41,436
Tax credit carryforwards		7,174		5,896
Capitalized research and development		1,394		1,879
Capitalized legal expenses		1,132		1,156
Other differences		1,370		1,048
Total deferred tax assets		59,177		51,415
Valuation allowance		(59,177)		(51,415)
Net deferred tax assets	$	—	$	—

The Company recorded an increase to the valuation allowance of $7.8 million during the year ended December 31, 2018 due primarily to the federal and state net operating losses and tax credits generated.The Company recorded a decrease to the valuation allowance of $8.4 million during the year ended December 31, 2017 primarily due to the federal rate reduction from 34% to 21% as a result of the Tax Act.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Due to the Company's history of losses and expectation of future losses, the deferred tax assets were fully offset by a valuation allowance at December 31, 2018 and 2017.

As of December 31, 2018, the Company had approximately $176.3 million of federal and $175.4 million of state net operating loss respectively, which may be available to offset future taxable income. Federal net operating loss carryforwards of $150.5 million and state net operating loss carryforwards of $175.4 million will expire at various dates from 2023 through 2037, $25.8 million of the federal net operating loss carryforward can be carried forward indefinitely. The Company had approximately $5.6 million of federal and $2.0 million of state tax credit carryforwards available to reduce future tax liabilities as of December 31, 2018, which will expire at varying times through the year 2038.

The Internal Revenue Code of 1986, as amended (the “Code”), provides for a limitation of the annual use of net operating losses and other tax attributes (such as research and development tax credit carryforwards) following certain ownership changes (as defined by the Code) that could limit the Company's ability to utilize these carryforwards. At this time, the Company has not completed a study to assess whether an ownership change under Section 382 of the Code has occurred, or whether there have been multiple ownership changes since the Company's formation, due to the costs and complexities associated with such a study. The Company may have experienced various ownership changes, as defined by the Code, as a result of past financing transactions. Accordingly, the Company's ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, the Company may not be able to take full advantage of these carryforwards for federal or state income tax purposes.

As of December 31, 2018 and 2017, the Company did not have any significant unrecognized tax benefits. The Company had not accrued interest or penalties related to uncertain tax positions.

The federal and state income tax returns are generally subject to tax examinations for the tax years ended December 31, 2015 through December 31, 2018. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state taxing authorities to the extent utilized in a future period.