Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 6. Income taxes

Income (loss) before income taxes included the following (in millions):

	Year Ended December 31,
	2022			2021		2020
Domestic	$	(267	)	$	54	$	(123	)
Foreign		1			1		-
Income (loss) before income tax	$	(266	)	$	55	$	(123	)

The provision for income taxes included the following (in millions):

	Year Ended December 31,
	2022		2021		2020
Current
Federal	$	-	$	1	$	-
State		1		1		-
Total income tax expense	$	1	$	2	$	-

The 2022 income tax expense considers the impact of the capitalization of R&D expenses for income tax purposes due to changes in U.S. legislation.

The reconciliation between the federal statutory income tax rate and our effective tax rate was as follows:

	Year Ended December 31,
	2022				2021				2020
Federal statutory income tax rate		21.0		%		21.0		%		21.0		%
State taxes, net of federal benefit		(0.1	)			0.8				-
Equity investment		0.9				(4.1	)			4.2
Research and development credits		3.1				(11.9	)			3.1
Change in valuation allowance		(24.5	)			(2.6	)			(27.4	)
Stock based compensation		0.1				(0.8	)			(0.2	)
Non-deductible expenses and other		(0.6	)			0.9				(0.7	)
Provision for income taxes		(0.1	)	%		3.3		%		0.0		%

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

Significant components of our deferred tax assets and liabilities were as follows (in millions):

	Year Ended December 31,
	2022			2021
Deferred tax assets:
Federal and state net operating loss carryforwards	$	24		$	24
Research and development credits carryforwards		22			13
Stock-based compensation		16			10
Depreciation and amortization		6			6
Deferred revenue		19			24
Lease liability		25			25
Capitalized research and development costs		53			-
Other		7			4
Total deferred tax assets		172			106
Deferred tax liabilities:
Right-of-use assets		(22	)		(23	)
Total deferred tax liabilities		(22	)		(23	)
Less valuation allowance		(150	)		(83	)
Net deferred tax assets (liabilities)	$	-		$	-

The accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of net deferred tax assets. We considered factors such as our history of operating losses, the nature of our deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible, including amounts that may arise under the collaboration agreement with Gilead entered into in 2020 and the 2021 program opt-ins. As a result of our evaluation of these factors, including the uncertainty that exists with respect to the option fees and milestone payments, we do not believe that it is more likely than not that the deferred tax assets will be realized. Accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying Consolidated Balance Sheets. The valuation allowance increased by approximately $67 million for the year ended December 31, 2022 and decreased by approximately $1 million for the year ended December 31, 2021.

The United States enacted the Tax Cuts and Jobs Act in December 2017, which requires companies to capitalize all of their R&D costs for U.S. tax purposes, including software development costs, incurred in tax years beginning after December 21,2021. Beginning in 2022, for tax purposes we began capitalizing and amortizing R&D costs over a five-year period for domestic research and a fifteen-year period for international research rather than expensing these costs immediately.

At December 31, 2022, we had total net operating loss carryforwards (NOLs) of $109 million that have no expiration date and federal research tax credits of approximately $18 million that begin to expire in 2039. We also have state NOLs of approximately $19 million that begin to expire in 2035, and state research tax credits of approximately $12 million that have no expiration date, and foreign research tax credits of approximately $3 million that have no expiration date. Use of the U.S. federal and state NOLs and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of U.S. tax law, as defined in Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before use. We have determined that an ownership change, as defined under IRC Section 382, occurred in previous years. While we do not expect these ownership changes to result in the expiration of net operating loss and credit carryforwards prior to utilization, we are subject to an annual limitation on the use of its tax attributes. The limitation on the use of net operating loss and credit carryforwards could reduce our ability to use a portion of the tax attributes to offset future taxable income.

We have not been audited by the Internal Revenue Service, any state or foreign tax authority. We are subject to taxation in the United States and in Australia. Due to net operating loss and research credit carryforwards, all of our tax years, from 2015 to 2022, remain open to U.S. federal and California state tax examinations. In addition, our fiscal years from 2018 to 2022 are open to examination in Australia.

Uncertain Tax Positions

We follow the provisions of FASB Accounting Standards Codification (ASC 740-10), Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax positions that have been taken or are expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the Consolidated Financial Statements. The reserve for unrecognized tax benefits was approximately $8 million and $5 million at December 31, 2022, and 2021, respectively.

Due to the full valuation allowance at December 31, 2022 and 2021, current adjustments to the unrecognized tax benefit will have no impact on our effective income tax rate; any adjustments made after the valuation allowance is released will have an impact on the tax rate.

Interest and penalties related to unrecognized tax benefits are included in the provision for income taxes. There were no interest or penalties accrued at December 31, 2022 or 2021.

The following table summarizes the activity related to our unrecognized tax benefits (in millions):

	Year Ended December 31,
	2022		2021
Beginning balance	$	5	$	3
Additions for tax positions taken in current year		3		2
Ending balance	$	8	$	5

As of December 31, 2022, the total amount of gross unrecognized tax benefits was $8 million, of which, if recognized, none would impact our effective tax rate. We do not anticipate material changes to our uncertain tax positions through the next 12 months.