INCOME TAXES

12 Months Ended

Dec. 31, 2022

INCOME TAXES

INCOME TAXES

14. INCOME TAXES

No provision for income taxes was recorded for the years ended December 31, 2022 and 2021. The Company has incurred net pre-tax losses in the United States only for all periods presented. The Company has not reflected any benefit of such net operating loss (“NOL”) carryforwards in the accompanying consolidated financial statements. The provision for income taxes differs from the amount expected by applying the federal statutory rate to the loss before taxes as follows:

	Year Ended December 31,
	2022		2021
Profit before tax at federal statutory rate	21.0	%	21.0	%
State tax benefit, net of federal benefit	0.6	%	0.4	%
Research and development credit carryovers	2.9	%	4.4	%
Permanent differences	(1.1)	%	(1.4)	%
Return to Provision True Ups	0.1	%	0.1	%
Change in valuation allowance	(23.5)	%	(24.5)	%
Effective income tax rate	—	%	—	%

In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the NOL carryforwards. The Company has recorded a valuation allowance against its deferred tax assets on December 31, 2022 and 2021 because the Company’s management believes that it is more likely than not that these assets will not be fully realized in the near future. The increase in the valuation allowance of approximately $22.3 million in the year ended December 31, 2022 primarily relates to the generation of net operating losses and research and development credits, and the capitalization of research and development costs that will be amortized in the future.

The Tax Cuts & Jobs Act (TCJA) requires taxpayers to capitalize and amortize research and development costs under Section 174 effective for tax years beginning on or after January 1, 2022. As a result, the Company capitalized $55.5M of research and development costs that will be amortized for tax purposes over 5 years if performed in the U.S. and over 15 years if performed outside of the U.S.

As of December 31, 2022, the Company had federal NOL carryforwards of approximately $58.0 million, all of which can be carried forward indefinitely, and state NOL carryforwards of $4.5 million, which begin to expire in 2040. The Company also has federal tax credits of $4.2 million and state tax credits of $0.5 million which may be used to offset future tax liabilities and will begin to expire in 2040. NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities.

Net deferred tax asset (liability) in the accompanying consolidated balance sheets consists of the following:

	December 31,
	2022		2021
	(in thousands)
Deferred tax assets and (liabilities)
Net operating losses	$	12,427	$	10,303
Research and development expenses		10,945		—
Research and development credit		4,645		1,697
Accrued expenses		711		130
Stock-based compensation		411		151
Other		135		—
Intangible assets		5,944		666
Gross deferred tax asset		35,218		12,947
Valuation allowance		(35,210)		(12,945)
Net deferred tax asset		8		2
Stock-based compensation		—		—
Fixed assets		(8)		(2)
Deferred tax liabilities		(8)		(2)
Net deferred tax asset (liability)	$	—	$	—

Subsequent ownership changes may further affect the limitation in future years. The Company has not conducted a study to assess whether a change of ownership has occurred or whether there have been multiple changes of ownership since Inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of ownership, as defined by Section 382 and 383 of the Internal Revenue Code, at any time since Inception, utilization of the NOL carryforwards or research and development tax credit carryforwards would be subject to the annual limitations under Section 382 and 383 of the Internal Revenue Code.

The Company will recognize both accrued interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. As of December 31, 2022, all tax returns remain open.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”), was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. The Company notes that these provisions did not have a material impact to the amounts recorded within this footnote.