Note 14. Income Taxes

Provision for Income Taxes

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets for federal and state income taxes are as follows (in thousands):

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of the Company’s lack of U.S. earnings history, the net U.S. deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $16.8 million and $30.4 million during the years ended December 31, 2024 and 2023, respectively.

Net Operating Loss and Tax Credit Carryforwards

As of December 31, 2024, the Company had a net operating loss carryforward for federal income tax purposes of $324.1 million, of which $91.9 million is subject to expiration beginning in 2031. The Company had a total state net operating loss carryforward of $302.5 million, which will begin to expire in 2031. Utilization of some of the federal and state net operating loss and credit carryforwards or other tax attributes, such as research tax credits, are subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and similar state provisions. Under Section 382 of the Code, "change in ownership" generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our operating results.

As of December 31, 2024, the Company has federal credits of $14.2 million, which will begin to expire in 2031 and state research credits of $12.0 million, which have no expiration date. These tax credits are subject to the same limitations discussed above. The Company determined that the ownership changes identified above had no significant impact on federal and state research credits.

Unrecognized Tax Benefits

The Company has incurred net operating losses since inception and does not have any significant unrecognized tax benefits in the balance sheet. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of operations. If the Company is eventually able to recognize its uncertain positions, the effective tax rate would be reduced. The Company currently has a full valuation allowance against its net deferred tax assets, which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Any adjustments to the Company’s uncertain tax positions would result in an adjustment of net operating loss or tax credit carryforwards rather than resulting in a cash outlay.

The Company files U.S. federal income tax returns and various state income tax returns. Because of net operating losses and research credit carryovers, substantially all the Company’s tax years remain open to examination.

Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next 12 months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. During the years ended December 31, 2024 and 2023, no interest or penalties were required to be recognized relating to unrecognized tax benefits.