CareDx, Inc. Income Taxes Disclosure

15. INCOME TAXES

Loss before income taxes for the years ended December 31, 2018, 2017 and 2016 is summarized as follows (in thousands):

 

 

The components of the provision for (benefit from) income taxes are summarized as follows (in thousands):

The Company's actual provision for tax differed from the amounts computed by applying the U.S. federal income tax rates of 21% and 34% to loss before income taxes as a result of the following:

Deferred income tax assets and liabilities consist of the following: (in thousands):

 

The Company assesses the realizability of its net deferred tax assets by evaluating all available evidence, both positive and negative, including (1) cumulative results of operations in recent years, (2) sources of recent losses, (3) estimates of future taxable income and (4) the length of net operating loss carryforward periods.  The Company believes that based on the history of its U.S. losses and other factors, the weight of available evidence indicates that it is more likely than not that it will not be able to realize its U.S. net deferred tax assets.  The Company has also placed a valuation allowance on the net deferred tax assets of its Australian operations. Accordingly, the U.S. and Australia net deferred tax assets have been offset by a full valuation allowance.  The valuation allowance increased by $5.4 million and decreased by $21.4 million during the years ended December 31, 2018 and 2017, respectively.

As of December 31, 2018, the Company had domestic federal net operating loss carryforwards of $207.5 million, domestic state net operating loss carryforwards of $80.9 million, and foreign net operating loss carryforwards of $8.7 million that can reduce future taxable income. The domestic federal and state net operating loss carryforwards will begin to expire in 2019 and 2028, respectively. The foreign net operating loss carryforwards can be carried forward indefinitely.

As of December 31, 2018, the Company had credit carryforwards of approximately $4.6 million and $5.8 million available to reduce future taxable income, if any, for domestic federal and California state income tax purposes, respectively. The domestic federal credit carryforwards begin to expire in 2021. California credits have no expiration date.

Utilization of the Company's net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The Company has not performed a Section 382 analysis subsequent to the 2007 tax year to determine if a change occurred and whether the use of net operating loss carryforwards and credit carryforwards will be limited to offset future taxable income. For financial statement purposes, the Company has included the federal and state net operating losses and credits in the deferred tax assets with a full valuation allowance. Based on a preliminary review of the Company's equity transactions since inception, the Company believes a portion of its net operating loss carryforwards and credit carryforwards may be limited due to equity financings which occurred in 2000, 2004, 2007, 2014 and through the current period.

A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):

 

Approximately $0.5 million of the $3.4 million of net unrecognized tax benefit as of December 31, 2018, if recognized, would impact the Company's effective tax rate. During the year ended December 31, 2018, given the Company's valuation allowance, the uncertain tax benefits would not have impacted the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2018, December 31, 2017 and December 31, 2016 the Company had $0.3 million of cumulative interest and penalties related to unrecognized tax benefits. The Company does not anticipate a significant change in the unrecognized tax benefits over the next twelve months.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to net operating loss and credit carryovers, the domestic federal and state income tax returns are subject to tax authority examination from inception. In jurisdictions where the Company files income tax returns, the statutes of limitations with respect to these jurisdictions vary from jurisdiction to jurisdiction and range from 3 to 6 years.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017, the Tax Act, was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017.  The Company calculated the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing which did not result in any additional income tax expense in the fourth quarter of 2017.  The enactment of the Tax Act also requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted.  Consequently, the Company accounted for a provisional estimated reduction of the U.S. deferred tax assets from $72.5 million to approximately $45.9 million with a corresponding decrease of $27.0 million to the Company’s valuation allowance. The Company completed its analysis of the impacts of the 2017 Tax Act in the fourth quarter of 2018 with no net change to its provisional estimates due to the valuation allowance.