Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The Tax Act was enacted on December 22, 2017 and includes a number of changes to existing tax laws that impact us, most notably it reduces the US federal corporate tax rate from 35% to 21%, for tax years beginning after December 31, 2017. The Tax Act made modifications to allowable tax depreciation, the deductability of compensation for officers, the deductibility of meals and entertainment expenses, and the deductibility of interest expense.

We remeasured our deferred tax assets and liabilities based on the impact of the federal tax rate change, recording a decrease to our net deferred tax asset balance and a corresponding increase to our income tax provision of approximately $0.6 million and $32.4 million for the year ended December 31, 2018 and 2017, respectively. We completed our accounting for the Tax Act during the fourth quarter of 2018.
The components of the income tax expense (benefit) for continuing operations are as follows (in thousands):
  Year Ended December 31,
  2018 2017 2016
Current expense (benefit):
Federal $ —  $ —  $ 21 
State 424  111  12 
Foreign (158) 261  — 
266  372  33 
Deferred expense (benefit):
Federal 29,928  44,075  10,534 
State (185) 228  (240)
Foreign —  —  — 
$ 30,009  $ 44,675  $ 10,327 

A reconciliation of income tax expense (benefit) from continuing operations to the amount computed by applying the statutory federal income tax rate to the net income (loss) from continuing operations is summarized as follows (in thousands):
 
  Year Ended December 31,
  2018 2017 2016
Tax at federal statutory rate $ 36,400  $ 20,031  $ 2,786 
State, net of federal benefit 1,635  622  175 
Contingent liabilities 948  903  1,225 
Share-based compensation (8,131) (4,019) 263 
Research and development credits (2,758) (2,821) (1,525)
Change in uncertain tax positions 858  1,308  1,423 
Rate change for changes in federal or state law 178  32,429  25 
Change in valuation allowance (4,225) (4,169) 6,283 
Expired NOLs and credits 3,054  —  — 
Change in derivatives 615  —  — 
Other 1,435  391  (328)
$ 30,009  $ 44,675  $ 10,327 

We 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%.  Significant components of our deferred tax assets and liabilities as of December 31, 2018 and 2017 are shown below. We assess the positive and negative evidence to determine if sufficient future taxable income will be generated to use the existing deferred tax assets. Our evaluation of evidence resulted in management concluding that the majority of our deferred tax assets will be realized. However, we maintain a valuation allowance to offset certain net deferred tax assets as management believes realization of such assets are uncertain as of December 31, 2018, 2017 and 2016. The valuation allowance decreased $2.5 million in 2018, decreased $8.4 million in 2017 and increased $6.3 million in 2016.
  December 31,
  2018 2017
  (in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 57,181  $ 90,272 
Research credit carryforwards 31,101  30,677 
Fixed assets and intangibles 1,637  1,984 
Accrued expenses 657  845 
Deferred revenue 957  17 
Capital Loss Carryforward —  1,609 
Investment in Viking —  5,137 
Other 11,430  12,499 
102,963  143,040 
Valuation allowance for deferred tax assets (4,476) (6,987)
Net deferred tax assets $ 98,487  $ 136,053 
Deferred tax liabilities:
Retrophin fair value adjustment (179) (243)
Convertible debt (2,905) (737)
Identified intangibles (44,643) (48,237)
Identified indefinite lived intangibles (1,759) (2,414)
Investment in Viking (2,480) — 
Net deferred tax liabilities $ (51,966) $ (51,631)
Deferred income taxes, net $ 46,521  $ 84,422 

As of December 31, 2018, we had federal net operating loss carryforwards set to expire through 2037 of $229.9 million and $125.3 million of state net operating loss carryforwards. We also have $23.0 million of federal research and development credit carryforwards, which expire through 2037. We have $22.7 million of California research and development credit carryforwards that have no expiration date.  

Pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, utilization of our net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of December 31, 2018 are net of any previous limitations due to Section 382 and 383.
We account for income taxes by evaluating a probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Our remaining liabilities for uncertain tax positions are presented net of the deferred tax asset balances on the accompanying consolidated balance sheet.
A reconciliation of the amount of unrecognized tax benefits at December 31, 2018, 2017 and 2016 is as follows (in thousands):
December 31, 
2018 2017 2016
Balance at beginning of year $ 29,363  $ 38,770  $ 36,452 
Additions based on tax positions related to the current year 1,247  1,067  70 
Additions for tax positions of prior years 336  109  2,408 
Reductions for tax positions of prior years (657) (10,583) (160)
Balance at end of year $ 30,289  $ 29,363  $ 38,770 

Included in the balance of unrecognized tax benefits at December 31, 2018 is $28.2 million of tax benefits that, if recognized would impact the effective rate. There are no positions for which it is reasonably possible that the uncertain tax benefit will significantly increase or decrease within twelve months.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2018 and December 31, 2017, we recognized an immaterial amount of interest and penalties. We file income tax returns in the United States, various state jurisdictions, United Kingdom, and Canada with varying statutes of limitations. The federal statute of limitation remains open for the 2014 tax year to the present. The state income tax returns generally remain open for the 2013 tax year through the present.  Net operating loss and research credit carryforwards arising prior to these years are also open to examination if and when utilized.
The IRS began an audit of our 2016 tax year during the quarter ended June 30, 2018. We believe our reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years. Notwithstanding the foregoing, we could adjust our provision for income taxes and contingent tax liability based on future developments.