11. Income Taxes

At December 31, 2017, the Company had deferred tax assets of $83.6 million. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax asset. Pursuant to Sections 382 and 383 of the Internal Revenue Code, or IRC, annual use of the Company’s net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period. The Company determined that such an ownership change occurred on December 29, 2006, as defined in the provisions of Section 382 of the IRC as a result of various stock issuances used to finance the Company’s operations. Such ownership change resulted in annual limitations on the utilization of tax attributes, including net operating loss carryforwards and tax credits. The Company estimates that $101.2 million of its net operating loss carryforwards were effectively eliminated under Section 382 for federal tax purposes. A portion of the remaining net operating losses limited by Section 382 become available each year. The Company also estimates that $12.2 million of its research and development credits and other tax credits were effectively eliminated under Section 383 for federal purposes. The company’s Section 382 analysis was completed through December 31, 2011. The Company has not, however, conducted a Section 382 study for any periods subsequent to December 31, 2011, and as such, the Company cannot provide any assurance that a change in ownership within the meaning of the IRC has not occurred since that date. There is a risk that additional changes in ownership could have occurred since that date. If a change in ownership were to have occurred, additional net operating loss and tax credit carryforwards could be eliminated or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and the tax bases of assets and liabilities using enacted tax rates. A valuation allowance is established to reduce deferred tax assets to the amount that is expected more likely than not to be realized.

Significant components of the Company’s deferred tax assets as of December 31, 2017 and 2016 are listed below. A valuation allowance of $83.6 million and $114.8 million at December 31, 2017 and 2016, respectively, has been recognized to offset the net deferred tax assets as realization of such assets is uncertain.

Amounts for the years ended December 31 were as follows (in thousands):

Deferred Tax Assets	2017			2016
Net operating losses	$	59,756		$	86,071
Credit carryovers		10,527			9,952
Depreciation and amortization		10,893			15,278
Deferred revenue		634			—
Accruals and reserves		450			701
Capital loss carryover		—			85
Other		1,350			2,677
Total deferred tax assets		83,610			114,764
Less valuation allowance		(83,610	)		(114,764	)
Net deferred tax assets	$	—		$	—

As part of the revaluation of the amounts disclosed within the financial statements related to the deferred tax assets in 2017 resulting from the Tax Cuts and Jobs Act (the “Act”) and in preparing the 2017 financial statement footnote disclosures, the Company determined that the December 31, 2016 deferred tax asset for net operating losses did not reflect the impact of the uncertain tax position recorded related to the Company’s orphan drug credits and was understated by $2.02 million with the valuation allowance also understated by the same amount. Accordingly, the 2016 amounts have been changed for the purposes of presentation within the above table. These changes in the disclosed deferred tax assets and valuation allowance did not impact the balance sheets or the statements of stockholders' equity, operations, comprehensive loss or cash flows as the Company is in a net loss position with a full valuation allowance on its deferred tax assets and were not considered to be material to the previously issued financial statements.

The reconciliation between the provision for income taxes and income taxes computed using the U.S. federal statutory corporate tax rate were as follows for the years ended December 31 (in thousands):

	2017			2016			2015
Computed “expected” tax benefit	$	(4,425	)	$	(3,051	)	$	(3,152	)
State income taxes, net of federal benefit		(268	)		(534	)		—
Tax effect of:
Change in valuation allowance		(31,665	)		(6,030	)		(4,069	)
Impact of Tax Cuts and Jobs Act		34,439			—			—
Rate change		—			—			3,524
Expiration of prior year credits and net operating losses		1,256			692			786
Stock compensation		458			491			376
Uncertain tax positions		276			9,010			3,074
Other		(71	)		(578	)		(539	)
Provision for income taxes	$	—		$	—		$	—

As of December 31, 2017 and 2016, the Company had available federal net operating loss carryforwards of approximately $318.9 million and $316.0 million, respectively, which expire from 2018 through 2037. In addition, the Company had federal research and development credit and orphan drug credit carryforwards of $26.3 million and $26.3 million as of December 31, 2017 and 2016, respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2018 through 2033 and are subject to review and possible adjustment by the Internal Revenue Service. The Company also has available California state net operating loss carryforwards of approximately $254.6 million and $269.6 million as of December 31, 2017 and 2016, respectively, which expire from 2028 to 2036. In addition, the Company had California research and development credits of approximately $8.8 million as of December 31, 2017 and 2016 to reduce future California income tax, if any. The California research and development credits do not expire.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies how several aspects of share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016. Upon adoption of this ASU as of January 1, 2017, unrecognized excess tax benefits of approximately $0.6 million were recognized with the impact recorded to retained earnings including a corresponding change to the valuation allowance.

The Act was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%. At December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances. In other cases, the Company has not been able to make a reasonable estimate and will continue to make and refine calculations as additional analysis is completed. In addition, estimates may also be affected as the Company gains a more thorough understanding of the 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%. However, the Company is still analyzing certain aspects of the Act and refining its calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company’s deferred tax balance was $34.4 million, which was fully offset by valuation allowance.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.

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

	2017			2016		2015
Beginning balance	$	17,561		$	4,340	$	582
Increases (decreases) related to prior year tax positions		(140	)		12,348		3,758
Increases related to current year tax positions		415			873		—
Ending balance	$	17,836		$	17,561	$	4,340

As of December 31, 2017 and 2016, the Company had gross unrecognized tax benefits of $17.8 million and $17.6 million, respectively, none of which would affect the effective tax rate. The Company does not anticipate any significant decreases in its unrecognized tax benefits over the next 12 months. The Company’s policy is to recognize the interest expense and/or penalties related to income tax matters as a component of income tax expense. The Company had no accrual for interest or penalties on its balance sheets at December 31, 2017 or December 31, 2016, and has not recognized interest and/or penalties in its statements of operations for any of the years ended December 31, 2017, 2016 or 2015.

The Company is subject to taxation in the United States and California. The Company’s tax years for 1998 and forward are subject to examination by the United States and California tax authorities due to the carryforward of unutilized net operating losses and R&D credits.