Income Taxes

12 Months Ended

Dec. 31, 2017

Deferred taxes represent the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Temporary differences result primarily from the recording of tax benefits of net operating loss carry forwards and stock-based compensation.

As of December 31, 2017, the Company has an insufficient history to support the likelihood of ultimate realization of the benefit associated with the deferred tax asset. Accordingly, a valuation allowance has been established for the full amount of the net deferred tax asset.

The Tax Cuts and Jobs Act (the "Act") was enacted in December 2017. Among other things, the primary provision of Tax Reform impacting the Company is the reduction to the U.S. corporate income tax rate from 35% to 21%, eliminating certain deductions and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries. The change in tax law required the Company to remeasure existing net deferred tax assets using the lower rate in the period of enactment resulting in an income tax expense of approximately $1.3 million which is fully offset by the corresponding tax benefit of $1.3 million on reduction in valuation allowance in the year ended December 31, 2017. In addition, there is no impact to current or deferred taxes related to the transition tax as the Company's foreign subsidiaries do not have cumulative positive earnings and profits. The Company has reported provisional amounts for the income tax effects of Tax Reform for which the accounting is incomplete but a reasonable estimate could be determined. There were no specific impacts of Tax Reform that could not be reasonably estimated which the Company accounted for under prior tax law. Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period.

The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:



	2017		2016		2015
Income tax benefit at the federal statutory rate	(34	)%	(34	)%	(34	)%
State income tax benefit, net of federal tax benefit	(6	)%	(6	)%	(6	)%
Statutory rate differential attributable to foreign operations	29	%	—	%	—	%
Change in fair value of warrant liability	—	%	7	%	8	%
Enactment of the Tax Cuts and Jobs Act	9	%	—	%	—	%
Derecognition due to Section 382 adjustment	192	%	—	%	—	%
Change in valuation allowance for deferred tax assets	(190	)%	35	%	32	%
Other	—	%	(2	)%	—	%
Total	—	%	—	%	—	%

Deferred taxes consisted of the following:



	December 31, 2017			December 31, 2016			December 31, 2015
Net operating loss carryforwards	$	851,633		$	27,267,545		$	20,091,036
Stock-based compensation	2,251,184			3,090,903			2,599,308
Less valuation allowance	(3,102,817		)	(30,358,448		)	(22,690,344		)
Net deferred tax asset	$	—		$	—		$	—

The valuation allowance decreased by $27,255,631, for the year ended December 31, 2017, and increased by $7,668,104 and $4,197,344 during the years ended December 31, 2016 and 2015, respectively. The reductions in the 2017 loss carryforward and valuation allowance are primarily due to Section 382 ownership change, as discussed below, and the enactment of the Tax Cut and Jobs Act.

As of December 31, 2017, the Company had federal and California income tax net operating loss carryforwards of approximately $3.0 million. These net operating losses will begin to expire in taxable years 2027 through 2036 and 2017 through 2036, respectively, unless previously utilized.

Section 382 of the Internal Revenue Code can limit the amount of net operating losses which may be utilized if certain changes to a company’s ownership occur. Generally, a Section 382 ownership change occurs if one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Similar rules may apply under state tax laws. Based upon management's calculations, in 2017 the Company experienced a change in ownership under Section 382 of the Internal Revenue Code and will result in the limitation of the Company's ability to utilize net operating losses. In addition, the Company may experience future ownership changes as a result of future offerings or other changes in ownership of the Company's stock. As a result, the amount of the net operation losses presented in our financial statements could be limited and may expire unutilized. The net operating losses presented above, reflect the reduction in the amounts available for carryforward based upon the Section 382 change in ownership that occurred in 2017.

During the fourth quarter of 2014, the Company licensed the non-U.S. rights to a significant portion of its intellectual property to its Bermuda-based subsidiary for approximately $11 million. The fair value of the intellectual property rights was determined by an independent third party. The proceeds from this sale represent a gain for U.S. tax purposes and were offset by current year losses and net operating loss carryforwards. However, the Internal Revenue Service, or the IRS, or the California Franchise Tax Board, or the CFTB, could challenge the valuation of the intellectual property rights and assess a greater valuation, which would require the Company to utilize a portion, or all, of its available net operating losses. If an IRS or a CFTB valuation exceeds the available net operating losses, the Company would incur additional income taxes. The Company’s ability to use its net operating losses is subject to the limitations of IRS Section 382, as well as expiration of federal and state net operating loss carryforwards.

In 2016, the Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), that provided certain simplifications to the accounting for stock based compensation including the presentation of excess tax benefits in the statement of cash flows. The Company has not experienced any excess tax benefits and the adoption of this standard did not have any impact on the Company's financial statements.

ImmunoCellular Therapeutics, Ltd. 10-K