Income Taxes

12 Months Ended

Dec. 31, 2020

12. Income Taxes

The components of our income tax expense (benefit) were as follows (in thousands):

	Year Ended December 31,
	2020			2019		2018
Current tax benefit
Federal	$	(6,630	)	$	—	$	—
State		—			—		—
Total current tax benefit		(6,630	)		—		—

Deferred tax expense
Federal		—			—		—
State		—			—		—
Total deferred tax expense		—			—		—

Total tax benefit	$	(6,630	)	$	—	$	—

We recorded an income tax benefit for the year ended December 31, 2020 for a tax refund of minimum tax paid for 2015. The refund was available to us after we carried back our 2017 net operating losses. Under the CARES Act and after the carryback claim of net operating losses, we were able to request the refund of the 2015 alternative minimum tax upon the filing of our 2019 income tax return.

The income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate as follows (in thousands):

	Year Ended December 31,
	2020			2019			2018
Federal statutory income tax	$	(19,102	)	$	(28,812	)	$	(29,495	)
State statutory income tax		1			1			1
Stock compensation		1,966			4,055			3,698
Nontaxable equity premiums		—			(20	)		(85	)
Change in valuation allowance		17,754			32,540			38,953
Income from shareholder		3,513			—			—
Research and orphan drug credits		(4,701	)		(8,015	)		(13,192	)
Tax benefit from alternative minimum tax credit refund		(6,630	)		—			—
Other permanent items		569			251			120
Income tax benefit	$	(6,630	)	$	—		$	—

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2020			2019
Net operating loss carryforwards	$	94,763		$	85,928
Research and orphan drug credits		73,608			68,053
Deferred revenue		122			1,372
Stock-based compensation		5,390			7,562
Capitalized license and depreciation basis differences		2,906			3,196
Reserves, accruals and tenant improvement allowances		1,090			1,389
Operating lease liability		10,158			10,619
Total deferred tax assets		188,037			178,119
Less: valuation allowance		(182,319	)		(168,691	)
Net deferred tax assets		5,718			9,428

Capitalized license and depreciation basis differences		(808	)		(2,374	)
Operating right-of-use asset		(4,557	)		(6,621	)
Prepaid expenses		(353	)		(433	)
Total deferred tax liabilities		(5,718	)		(9,428	)
Total net deferred tax assets	$	—		$	—

Based on all available objective evidence, we determined it is more likely than not that we will not fully realize all our net deferred tax assets. The available objective evidence considered was our inability to further recover any taxes previously paid and expectation of future taxable income. Accordingly, we recorded a valuation allowance against all our net deferred tax assets for the years ended December 31, 2020 and 2019. We will continue to maintain a full valuation allowance on our net deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of this allowance. Our valuation allowance increased by $13.6 million and $34.2 million during 2020 and 2019, respectively.

As of December 31, 2020, our total net deferred tax assets, net of gross deferred tax liabilities, were $182.3 million. Due to our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. In assessing the realizability of deferred tax assets, we considered whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Due to our history of losses and lack of other positive evidence, we determined that it is more likely than not that our net deferred tax assets will not be realized, and therefore, the net deferred tax assets are fully offset by a valuation allowance.

The deferred tax assets were primarily comprised of federal and state tax net operating losses and tax credit carryforwards. As of December 31, 2020, we had federal net operating loss carryforwards of approximately $416.3 million, which will start to expire beginning in 2024, and state net operating loss carryforwards of approximately $165.9 million, which will start to expire beginning in 2028. In addition, as of December 31, 2020, we had federal research and development and orphan drug credit carryforwards of approximately $67.2 million, which will start to expire in 2026, and state research and development credit carryforwards of approximately $24.8 million, which can be carried forward indefinitely.

Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, and by similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. Under the Tax Act, the carry forward period of net operating losses generated from 2018 forward is indefinite. However, the carryforward period for net operating losses generated prior to 2018 remains the same. To date, we have reduced our tax attributes (NOLs and tax credits) by approximately $1.4 million as a result of ownership changes. Any additional ownership change, if identified, may further limit the available tax attributes to offset our future taxable income in future periods.

Unrecognized tax benefits are primarily tax credits for all years and state net operating loss carryover related for certain prior years. For the years ended December 31, 2020, 2019 and 2018, we recorded no interest or penalties related to income taxes. A reconciliation of our unrecognized tax benefits is as follows (in thousands):

	Year Ended December 31,
	2020		2019		2018
Balance at beginning of year	$	18,393	$	16,660	$	13,584
Additions for prior year tax positions		—		11		622
Additions for current year tax positions		1,020		1,722		2,454
Balance at end of year	$	19,413	$	18,393	$	16,660

In the event we are able to recognize these uncertain positions, most of the unrecognized tax benefits would reduce our effective tax rate. We currently have a full valuation allowance against our deferred tax assets, which would impact the timing of the effective tax rate benefit, should any of these uncertain positions be favorably settled in the future. We do not believe it is reasonably possible that our unrecognized tax benefits will significantly change within the next twelve months.

We file U.S. and state income tax returns with varying statutes of limitations. The tax years from 2003 forward remain open to examination due to the carryover of unused net operating losses and tax credits. We have no ongoing tax examinations by tax authorities at this time.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details

FIVE PRIME THERAPEUTICS, INC. 10-K