ACHN 2017 Annual Report

Achillion Pharmaceuticals, Inc. Notes to Financial Statements—(Continued) (in thousands, except per share amounts) At December 31, 2017, the Company had the following net operating loss and credit carryforwards available: As of December 31, 2017 Federal net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $369,929 State net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,646 Federal research and development credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . 6,859 State research and development credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,047 The Company’s federal net operating loss carryforwards expire commencing in 2018 through 2037 and state net operating loss carryforwards which expire commencing in 2020 through 2037. The Company’s federal research and development credit carryforwards expire commencing in 2028 through 2036. The Connecticut research and development carryforwards have no expiration period. Deferred tax assets relating to tax benefits of employee stock options have been reduced to reflect exercises. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (“windfalls”). Prior to the adoption of ASU 2016-09 for the year ended December 31, 2017, the additional tax benefit associated with the windfall was not recognized until the deduction reduced taxes payable. Accordingly, the tax benefit of approximately $14,579 of the net operating loss carryforwards available but previously unrecognized, have been recognized upon adoption of ASU 2016-09. There was an offsetting adjustment to the valuation allowance equal to the tax benefit recognized for the windfall, resulting in no net tax impact upon adoption of ASU 2016-09. Utilization of the net operating losses and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, or Section 382, due to changes in ownership of the Company that have occurred previously or that could occur in the future. The changes in ownership resulted in net operating loss carryforwards and research and development credits that the Company expects to expire unutilized and thus are not included in gross deferred tax assets disclosed above. The Company will continue to update its analysis of ownership changes and the potential limitations on its deferred tax assets. The federal and state tax authorities could challenge tax positions taken by the Company for the periods for which there are open tax years. Years subject to audit are years in which unused net operating losses were generated that remain open by the statute of limitations. The Company is open to challenge for the periods of 2006 through 2017 in federal and the State of Connecticut jurisdictions. The Company did not have any unrecognized tax benefits as of December 31, 2017 and 2016. The State of Connecticut provides companies with the opportunity to exchange certain research and development credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credit. The program provides for such exchange of the research and development credits at a rate of 65% of the annual research and development credit, as defined. The Company records the benefit for the estimated proceeds from the exchange as a reduction of research and development expenditures. F-27