Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.22.4
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of the income tax expense (benefit) for continuing operations are as follows (in thousands):
  Year Ended December 31,
  2022 2021 2020
Current expense (benefit):
Federal $ 10,097  $ 460  $ 10,820 
State 193  (22) 541 
Foreign 452  —  23 
10,742  438  11,384 
Deferred expense (benefit):
Federal (3,656) (2,901) (13,456)
State 34,144  (1,685) (3,234)
30,488  (4,586) (16,690)
Total income tax expense (benefit) $ 41,230  $ (4,148) $ (5,306)

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,
  2022 2021 2020
Tax at federal statutory rate $ 7,562  $ 15,163  $ 272 
State, net of federal benefit 264  (82) (1,231)
FDII (2,395) (637) (1,652)
Rate change for changes in federal, foreign or state law (535) (7,963) (164)
Change in uncertain tax positions (158) 480  (673)
Sale of Vernalis R&D —  —  127,372 
Contingent liabilities 15  (7,993) (266)
Foreign tax differential on income/loss of foreign subsidiaries 103  (114) (3,839)
Research and development credits 256  (1,628) (168)
Debt repurchases 626  —  — 
Subpart F income 853  1,392  25 
Share-based compensation 1,279  (12,080) (623)
Provision to return adjustments 2,232  (1,347) (5,920)
Officer compensation 5,869  3,239  2,410 
Change in valuation allowance 24,799  11,245  (121,864)
Other 460  (3,823) 1,015 
$ 41,230  $ (4,148) $ (5,306)

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, 2022 and 2021 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, 2022, 2021 and 2020. The valuation allowance increased $21.5 million in 2022, increased $11.4 million in 2021 and decreased $116.5 million in 2020.
We offset all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them on our consolidated balance sheet as a non-current deferred income tax asset or liability (as applicable). Deferred tax assets
(liabilities) are comprised of the following:
  December 31,
  2022 2021
  (in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 53,960  $ 63,471 
Research credit carryforwards 26,309  26,908 
Stock compensation 11,158  9,743 
Other 19,542  12,989 
110,969  113,111 
Valuation allowance for deferred tax assets (57,472) (35,931)
Net deferred tax assets $ 53,497  $ 77,180 
Deferred tax liabilities:
Identified intangibles (64,696) (66,848)
     Other (10,886) (5,459)
Net deferred tax liabilities $ (75,582) $ (72,307)
Deferred income taxes, net $ (22,085) $ 4,873 
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 requires taxpayers to capitalize and amortize R&D expenditures over five years for domestic research and 15 years for foreign research pursuant to Section 174 of the Internal Revenue Code of 1986, as amended. We recorded an increase of $4.7 million to our current federal income tax expense and deferred tax assets for continuing operations during 2022 due to the capitalization of R&D under Section 174.
As of December 31, 2022, we had federal net operating loss carryforwards set to expire through 2037 of $81.1 million and $168.3 million of state net operating loss carryforwards that begin to expire in 2028. We also have $8.5 million of federal research and development credit carryforwards, which expire through 2040. We have $29.0 million of California research and development credit carryforwards that have no expiration date. In addition, we have approximately $96.1 million of non-U.S. net operating loss carryovers and approximately $15.6 million of non-U.S. capital loss carryovers that have no expiration date.
At December 31, 2021 we had federal net operating loss carryforwards set to expire through 2037 of $117.5 million and $170.1 million of state net operating loss carryforwards that begin to expire in 2028. We also had $9.3 million in federal research and development credit carryforwards, which expire through 2040, and $29.0 million of California research and development credit carryforwards that have no expiration date. In addition, we had approximately $101.6 million of non-U.S. capital loss carryovers and approximately $17.5 million of non-U.S. capital loss carryovers 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, 2022 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, 2022, 2021 and 2020 is as follows (in thousands):
December 31,
2022 2021 2020
Balance at beginning of year $ 29,550  $ 31,619  $ 28,647 
     Additions based on tax positions related to the current year 58  252  3,911 
     Additions for tax positions of prior years —  751  15 
     Reductions for tax positions of prior years (512) (3,072) (954)
Balance at end of year $ 29,096  $ 29,550  $ 31,619 
Included in the balance of unrecognized tax benefits at December 31, 2022 is $27.3 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, 2022 and December 31, 2021, 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 2019 tax year to the present. The state income tax returns generally remain open for the 2018 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 Ligand California tax returns for 2019 and 2020 are currently under audit. We believe our reserve for unrecognized tax benefits and contingent tax issues is adequate with respect to all open years.