17. INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act") was enacted in the U.S. The Act reduces the U.S. federal corporate tax rate from 35% to 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. On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). SAB 118 directs taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available to prepare or analyze (including computations) in reasonable detail to complete its accounting for the change in tax law.

At December 31, 2017, the Company made reasonable estimates of the effects of the Act on its existing U.S. deferred tax balances. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, and state tax conformity to federal tax changes.

The Company incurred a $1.8 million state income tax liability in 2017. The state tax liability relates to tax on income of Sarepta U.S. in states where the Company had a profit in excess of net operating losses.

The Company incurred a $0.2 million current federal income tax for alternative minimum tax (“AMT”). Under the Act, corporate AMT is repealed for tax years beginning after December 31, 2017. Any AMT credit carryovers to tax years after that date generally may be utilized to the extent of the taxpayer’s regular tax liability. In addition, under the Act, any excess AMT credits are partially refundable in 2018, 2019, and 2020, and fully refundable in 2021. The Company has recorded a noncurrent receivable for the amount of expected refund of the AMT.

The Company did not incur any federal, state, or foreign income taxes in 2016 and 2015.

For the year ended December 31, 2017, the Company incurred domestic and foreign pre-tax losses of $45.7 million and $2.9 million.

The following table summarizes the reconciliation between the Company’s effective tax rate and the income tax rate for each of the periods indicated:

	For the Year Ended December 31,
	2017				2016				2015
Federal income tax rate		34.0		%		34.0		%		34.0		%
State taxes		(27.7	)			—				—
Research and development and other tax credits		8.5				1.5				0.3
Valuation allowance		(93.2	)			(17.3	)			(19.1	)
Permanent differences		6.4				(3.4	)			(1.7	)
Sarepta International C.V. return to provision		62.1				—				—
Impact of tax reform, net of valuation allowance		5.9				—				—
Foreign rate differential		(0.6	)			(14.8	)			(13.5	)
Other		0.4				—				—
Effective tax rate		(4.2	)	%		—		%		—		%

As a result of the Act, the Company remeasured all deferred tax assets and liabilities based on the rates at which they are anticipated to reverse in the future, which is generally 21%. This reduction to the Company’s deferred tax assets by approximately $87.0 was fully offset by a corresponding decrease in its valuation allowance, resulting in no net tax impact to the Company.

Permanent differences affecting the Company’s effective tax rate primarily include excess tax deductions, net of non-deductible stock-based compensation.

In December 2012, the Company licensed certain intellectual property of Sarepta Therapeutics, Inc. to its wholly owned subsidiary, Sarepta International C.V. The parties also entered into a contract research agreement under which Sarepta Therapeutics, Inc. performs research services for Sarepta International C.V. In January 2016, Sarepta Therapeutics, Inc. entered into a manufacturing and distribution agreement as well as service agreement with Sarepta International C.V. In conjunction with its recent filings, it was determined that Sarepta International C.V. in 2016 and 2017 were effectively connected with the conduct of a trade or business by the entity in the U.S. and, accordingly, the 2016 and 2017 losses are subject to U.S. income taxes. For the years ended December 31, 2017 and 2016, Sarepta International C.V. incurred losses of $172.8 million and $214.3 million, respectively.

The following table summarizes the analysis of the deferred tax assets and liabilities for each of the periods indicated:

	As of December 31,
	2017			2016
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	144,897		$	174,569
Difference in depreciation and amortization		1,210			2,589
Research and development and other tax credits		44,306			37,812
Stock-based compensation		14,392			16,166
Deferred rent		1,210			2,306
Deferred revenue		904			1,315
Capitalized inventory		22,127			36,282
Other		4,071			3,047
Total deferred tax assets		233,117			274,086
Deferred tax liabilities:
Debt discount		(28,548	)		—
Total deferred tax liabilities		(28,548	)		—
Valuation allowance		(204,569	)		(274,086	)
Net deferred tax assets	$	—		$	—

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of U.S. federal and state net operating loss carryforwards, research and development tax credit carryforwards, stock-based compensation expense, capitalized inventory and intangibles. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of net federal and state deferred tax assets. Accordingly, a full valuation allowance of the net deferred tax asset had been established at December 31, 2017 and 2016. The net change in the valuation allowance for deferred tax assets was a decrease of $69.5 million and an increase of $54.2 million for the years ended December 31, 2017 and 2016, respectively. This decrease for the year ended December 31, 2017 was primarily due to a reduction in the federal tax rate from 34% to 21% under the Act signed into law on December 22, 2017 and the utilization of federal and state net operating losses.

As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $249.3 million and $174.8 million, respectively, available to reduce future taxable income, which will expire between 2018 and 2037. In addition, the Company had $387.1 million of federal net operating loss carryforwards generated by its wholly-owned subsidiary, Sarepta International C.V., which will expire between 2036 and 2037. Utilization of these net operating losses could be limited under Section 382 of the Internal Revenue Code and similar state laws based on ownership changes and the value of the Company’s stock. Additionally, the Company has $34.3 million and $11.5 million of federal and state research and development credits, respectively, available to offset future taxable income. These federal and state research and development credits begin to expire between 2018 and 2037 and between 2018 and 2032, respectively. The Company also has foreign net operating loss carryforwards of $2.9 million, which will expire in 2024.

The follow table summarizes the reconciliation of the beginning and ending amount of total unrecognized tax benefits for each of the periods indicated:

	For the Year Ended December 31,
	2017			2016		2015
	(in thousands)
Balance at beginning of the period	$	4,644		$	3,706	$	—
Increase related to current year tax positions		735			801		613
Increase related to prior year tax positions		—			137		3,093
Decrease related to prior year tax position		(245	)		—		—
Balance at end of the period	$	5,134		$	4,644	$	3,706

The balance of total unrecognized tax benefits at December 31, 2017, if recognized, would not affect the effective tax rate on income from continuing operations, due to a full valuation allowance against the Company’s deferred tax assets. The Company does not expect that the amount of unrecognized tax benefits to change significantly in the next twelve months. The Company, including its domestic subsidiaries, files consolidated U.S. federal and state income tax returns. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. It had no accrual for interest or penalties on its balance sheet at December 31, 2017 or 2016 and has not recognized interest and/or penalties in the statement of operations for years ended December 31, 2017, 2016 or 2015.