|12 Months Ended|
Dec. 31, 2021
|Income Taxes [Abstract]|
The effective tax rate for the years ended December 31, 2021 and 2020 was zero percent.
A reconciliation of income tax computed at the statutory federal income tax rate to the provision (benefit) for income taxes included in the accompanying statements of comprehensive loss is as follows for the years ended December 31, 2021 and 2020:
Significant components of the Company’s deferred tax assets and liabilities are summarized in the tables below as of December 31, 2021 and 2020:
As of December 31, 2021 and 2020, the Company had gross deferred tax assets of approximately $21.7 million and $4.6 million, respectively. Realization of the deferred assets is primarily dependent upon future taxable income, if any, the amount and timing of which are uncertain. The Company has had significant pre‑tax losses since its inception. The Company has not yet generated revenues and faces significant challenges to becoming profitable. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance of $21.7 million and $4.6 million as of December 31, 2021 and 2020, respectively. U.S. net deferred tax assets will continue to require a valuation allowance until the Company can demonstrate their realizability through sustained profitability or another source of income.
As of December 31, 2021 and 2020, the tax effect of the Company’s federal net operating loss carryforwards was approximately $15.7 million and $2.7 million, respectively. The Company had federal research credit carryforwards as of December 31, 2021 and 2020 of approximately $1.0 million and $0.3 million, respectively. The federal net operating loss carryforwards will not expire and the tax credit carryforwards will begin to expire in 2040 if not utilized. As of December 31, 2021 and 2020, the Company had state net operating loss carryforwards with a tax effect of approximately $3.6 million and $0.6 million, respectively. The Company did not have any state research credit carryforwards as of December 31, 2021 and 2020. The state net operating loss carryforwards will begin to expire in 2028.
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. Generally, in addition to certain entity reorganizations, the limitation applies when one or more “5-percent shareholders” increase their ownership, in the aggregate, by more than 50 percentage points over a 3 year testing period, or beginning the day after the most recent ownership change, if shorter. The annual limitation may result in the expiration of net operating losses and credits before utilization. As a result of the Merger, the Company recorded deferred tax assets of $10.3 million relating to net operating loss carryforwards which were fully offset by a valuation allowance. The $10.3 million net deferred tax assets recorded in relation to the Merger did not include federal and state net operating loss carryforwards that were estimated to expire under Internal Revenue Code Sections 382 as a result of the Merger. The Company has not yet evaluated the impact of Section 382 and Section 383 on its remaining tax attributes that were generated by Ocuphire since the formation of the Company in 2018.
The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions as of December 31, 2021 and 2020, and as such, no interest or penalties were recorded to income tax expense.
The Company’s corporate returns are subject to examination for the beginning with the 2018 tax year for both federal income tax purposes and for state income tax purposes in one state jurisdiction.
The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef