Income Taxes

12 Months Ended

Dec. 31, 2024

12. Income Taxes

Loss before income tax expense consists of the following:


	Year Ended December 31,
	2024			2023			2022
	(in thousands)
Domestic	$	(401,549	)	$	(541,656	)	$	(532,539	)
Foreign		883			167			(245	)
	$	(400,666	)	$	(541,489	)	$	(532,784	)

There is no current or deferred provision for income taxes because the Company has historically incurred and utilized operating losses prior to the year ended December 31, 2024. As of December 31, 2024, the Company continues to maintain a full valuation allowance against its net deferred tax assets. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of changes in the valuation allowance.

A reconciliation of the U.S. statutory rate to the Company’s effective tax rate is as follows:


	Year Ended December 31,
	2024			2023			2022
Tax due at statutory rate		21.0	%		21.0	%		21.0	%
State taxes, net of federal		1.9			4.1			1.8
Stock-based compensation		(10.2	)		(1.7	)		(1.9	)
Federal and state tax credits		2.9			2.4			2.1
Change in valuation allowance		(15.4	)		(26.2	)		(23.0	)
Other		(0.2	)		0.4			—
		0.0	%		0.0	%		0.0	%

For the year ended December 31, 2024, the impact from stock-based compensation on the Company’s effective tax rate was primarily caused by cancellations of vested non-qualified stock options.

Significant components of the Company’s net deferred tax assets at December 31, 2024 and 2023 are as follows:


	December 31,
	2024			2023
	(in thousands)
Net operating losses	$	490,891		$	428,785
Tax credits		145,113			133,602
Capitalized research and development expenses		128,001			110,690
Stock-based compensation		23,967			53,860
Accrued expenses		5,491			7,018
Depreciation and amortization		1,914			1,456
Lease liability		2,748			1,207
Right of use asset		(2,497	)		(1,042	)
Other		1,090			(382	)
Total net deferred tax asset before valuation allowance		796,718			735,194
Valuation allowance		(796,718	)		(735,194	)
	$	—		$	—

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law. The IRA introduced new tax provisions, including a 15.0% corporate alternative minimum tax and a 1.0% excise tax on stock repurchases. The provisions of the IRA are effective for periods after December 31, 2022. The enactment of the IRA did not result in any material adjustments to the Company’s income tax provision or net deferred tax assets as of December 31, 2024 and 2023.

As of December 31, 2024, the Company had federal net operating loss carryforwards of $2.0 billion, of which $30.4 million begin to expire in 2033 and the remainder do not expire but are subject to 80% limitation. As of December 31, 2024, the Company had state net operating loss carryforwards of $1.1 billion that begin to expire in 2033. As of December 31, 2024, the Company had federal and state research and development tax credits carryforwards of $90.5 million and $18.4 million, respectively, which begin to expire in 2031 and 2032, respectively. As of December 31, 2024, the Company had federal orphan drug tax credit carryforwards of $40.1 million, which begin to expire in 2034.

As of December 31, 2024, net deferred tax assets before the valuation allowance increased $61.5 million, primarily due to the capitalization of research and development expenses and the increase of federal and state net operating loss carryforwards due to the loss generated for the year ended December 31, 2024, offset by the cancelation of vested nonqualified stock options resulting from the workforce reductions during the years ended December 31, 2024 and 2023. This increase in net deferred tax assets was offset by a corresponding increase in the valuation allowance.

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of federal and state net operating loss, capitalized research and development expenses and tax credit carryforwards. 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 its federal and state deferred tax assets. Accordingly, a full valuation allowance of $796.7 million and $735.2 million has been established at December 31, 2024 and 2023, respectively. The valuation allowance increased by $61.5 million for the year ended December 31, 2024, primarily due to the capitalization of research and development expenses and generation of net operating losses, offset by the cancelation of vested nonqualified stock options. The valuation allowance increased by $141.9 million and $122.7 million for the years ended December 31, 2023 and 2022, respectively, primarily due to the capitalization of research and development expenses and generation of net operating losses.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, (the “Code”), and similar state tax law, certain substantial changes in the Company’s ownership may result in a limitation on the amount of net operating loss and tax credit carryforwards that may be used in future years. Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Code, due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net

operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company completed a Section 382 study through December 31, 2020. Based on the study, the Company underwent two ownership changes for Section 382 purposes which occurred on March 11, 2014 and December 31, 2015. As a result of the ownership changes, the Company’s net operating loss and tax credit carryforwards as of the ownership change dates are subject to limitation under Section 382; however, these limitations are not expected to cause any of the impacted net operating loss and tax credit carryforwards to expire unused. Subsequent ownership changes, as defined by Section 382, may potentially further limit the amount of net operating loss and tax credit carryforwards that could be utilized to offset future taxable income and tax.

The Company applies the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Company to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals of litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon the ultimate settlement with the relevant taxing authority.

The following table reconciles the beginning and ending amounts of gross unrecognized tax benefits, excluding interest and penalties, if any, for the years ended December 31, 2024, 2023, and 2022:


	2024		2023		2022
	(in thousands)
Balance as of January 1	$	7,743	$	6,846	$	6,084
Increases related to current year tax positions		520		655		697
Increases related to prior year tax positions		15		242		65
Balance as of December 31	$	8,278	$	7,743	$	6,846

For the years ended December 31, 2024, 2023, and 2022, the increases in unrecognized tax benefits related to current year and prior year tax positions with respect to the Company’s federal and state tax credits.

The Company’s policy is to record interest and penalties related to income taxes as part of the tax provision. As of December 31, 2024 and 2023, the Company had no accrued interest or penalties related to income taxes and no amounts have been recognized in the Company’s statements of operations and comprehensive loss for the years ended December 31, 2024, 2023, and 2022.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and foreign jurisdictions, where applicable. There are currently no pending tax examinations, and the Company’s tax returns are generally open under statute from 2021 to the present. Tax attributes such as net operating losses and tax credits generated prior to 2021 and utilized in open years may still be adjusted upon examination.

- Definition

The entire disclosure for income tax.

+ References

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+ Details

Sage Therapeutics, Inc. 10-K