Income Taxes

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Income taxes

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

	Year Ended December 31,
	2023		2022		2021
Domestic	$	(301)	$	(267)	$	54
Foreign	—		1		1
Income (loss) before income tax	$	(301)	$	(266)	$	55

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

	Year Ended December 31,
	2023		2022		2021
Current provision:
Federal	$	4	$	—	$	1
State	2		1		1
Total income tax expense	$	6	$	1	$	2

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

	Year Ended December 31,
	2023		2022		2021
Federal statutory income tax rate	21.0	%	21.0	%	21.0	%
State taxes, net of federal benefit	(0.7)	%	(0.1)	%	0.8	%
Equity investment	0.4	%	0.9	%	(4.1)	%
Research and development credits	5.2	%	3.1	%	(11.9)	%
Change in valuation allowance	(26.3)	%	(24.5)	%	(2.6)	%
Stock based compensation	(2.1)	%	0.1	%	(0.8)	%
Non-deductible expenses and other	0.5	%	(0.6)	%	0.9	%
Provision for income taxes	(2.0)	%	(0.1)	%	3.3	%

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,
	2023		2022
Deferred tax assets:
Federal and state net operating loss carryforwards	$	1	$	24
Research and development credits carryforwards	26		22
Stock-based compensation	21		16
Depreciation and amortization	3		6
Deferred revenue	66		19
Lease liability	26		25
Capitalized research and development costs	109		53
Other	1		7
Total deferred tax assets	253		172
Deferred tax liabilities:
Right-of-use assets	(20)		(22)
Total deferred tax liabilities	(20)		(22)
Less valuation allowance	(233)		(150)
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 agreements with Gilead and related 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 $83 million for the year ended December 31, 2023 and increased by approximately $67 million for the year ended December 31, 2022.

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, 2023, we have federal research tax credits of approximately $24 million that begin to expire in 2039. We also have state NOLs of approximately $21 million that begin to expire in 2035, and state research tax credits of approximately $15 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 IRC Sections 382 and 383, 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 2023, remain open to U.S. federal and California state tax examinations. In addition, our fiscal years from 2019 to 2023 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 $13 million and $8 million at December 31, 2023, and 2022, respectively.

Due to the full valuation allowance at December 31, 2023 and 2022, 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 material interest or penalties accrued at December 31, 2023 or 2022.

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

	Year Ended December 31,
	2023		2022
Beginning balance	$	8	$	5
Additions for tax positions taken in prior year	2		—
Additions for tax positions taken in current year	3		3
Ending balance	$	13	$	8

As of December 31, 2023, the total amount of gross unrecognized tax benefits was $13 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.