MNKD 2017 Annual Report

been recorded to offset this deferred tax asset. During the years ended December 31, 2017 and 2016, the change in the valuation allowance was $(260.2) million and $(48.1) million, respectively. At December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $2.0 billion and $2.2 billion available, respectively, to reduce future taxable income. These losses are available to reduce taxable income and have started expiring, starting in the current year through various future dates for both federal and state purposes. As a result of the Company’s initial public offering, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in August 2004. As a result, federal net operating loss and credit carry forwards of approximately $216.0 million are subject to an annual use limitation of approximately $13.0 million. The annual limitation is cumulative and therefore, if not fully utilized in a year can be utilized in future years in addition to the Section 382 limitation for those years. The federal net operating losses generated subsequent to the Company’s initial public offering in August 2004 are currently not subject to any such limitation as there have been no ownership changes since August 2004 within the meaning of Internal Revenue Code Section 382. At December 31, 2017, the Company had research and development credits of $55.1 million and $28.4 million for federal and state purposes, respectively. The federal credits begin to expire in 2024, and the state credits may be carried forward indefinitely. The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business the Company is subject to examination by taxing authorities throughout the country. These audits could include examining the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state and local laws. The Company’s tax years since 2012 remain subject to examination by federal, state and foreign tax authorities. We adopted ASU 2016-09 in the first quarter of 2017. Under the new guidance companies will no longer record excess tax benefits and certain tax deficiencies related to share-based payments to employees in additional paid-in capital (APIC). Instead, the Company will recognize all income tax effects of awards in our income statement when awards vest or are settled. All excess tax benefits not previously recognized were to be recorded to retained earnings as a cumulative effect adjustment upon adoption. Upon adoption, no adjustment to retained earnings was necessary due to the Company’s valuation allowance position. Approximately $10.8 million attributable to excess tax benefits on stock compensation that had not been previously recognized were added to the Net Operating Loss with a corresponding increase to the valuation allowance. At December 31, 2017 and 2016, the Company has not recognized a liability for unrecognized tax benefits If any were recognized, it would affect the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2017, the interest and penalties recognized were not material. During the years ended December 31, 2016 and 2015 the Company recognized and accrued an insignificant amount of interest or penalties related to unrecognized tax benefits. The Company considers its undistributed earnings of foreign subsidiaries to be permanently reinvested in foreign operations and has not provided for U.S. income taxes on such earnings. As of December 31, 2017 the Company had no undistributed earnings from its foreign subsidiaries. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code of 1986, as amended. The 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, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 119