Mustang Bio, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

Note 9 - Income Taxes

For financial reporting purposes, the Company calculated income tax provision and deferred income tax balances as if it was a separate entity and had filed its own separate tax return under Sub-Chapter C of the Internal Revenue Code.

A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:

	For the year ended December 31,						For the period from March 13, 2015 (Inception) to December 31,
	2017			2016			2015
Statutory federal income tax rate		35	%		35	%	35	%
State taxes, net of federal tax benefit		9	%		13	%	5	%
Non-deductible items		(2)	%		(3)	%	(2)	%
Credits		-			-		1	%
Federal tax rate change		(18)	%		-		-
State tax rate change		(1)	%		1	%	-
Other		(1)	%		1	%	-
Change in valuation allowance		(22)	%		(47)	%	(39)	%
Income taxes provision (benefit)		-			-		-

The components of the net deferred tax asset as of December 31, 2017 and 2016 are the following ($ in thousands):

	For the year ended December 31,
	2017		2016
Deferred tax assets:
Net operating loss carryovers	$	7,236	$	3,310
Stock compensation and other		697		301
Change in warrant liability		50		76
Amortization of license		6,424		3,848
Accruals and reserves		22		-
Startup costs		8		13
Tax credits		178		89
Total deferred tax assets	$	14,615	$	7,637
Less valuation allowance		(14,615)		(7,637)
Deferred tax assets, net of allowance	$	-	$	-

On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, was signed into law. Among other items, H.R.1 reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company has recorded a decrease related to deferred tax assets of $5.7 million, with a corresponding net adjustment to deferred income tax expense of $5.7 million for the year ended December 31, 2017.

The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during the measurement period. The Company is in the process of analyzing the impact of the various provisions of the Tax Act. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

The Company has determined, based upon available evidence, that it is more likely than not that the net deferred tax asset will not be realized and, accordingly, has provided a full valuation allowance against its net deferred tax asset. A valuation allowance of approximately $14.6 million and $7.6 million, respectively, was recorded for the year ended December 31, 2017 and 2016.

As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $23.8 million and $33.7 million, respectively. The federal and state net operating loss carryforwards will begin to expire, if not utilized, by 2035 and 2035, respectively. Utilization of the net operating loss carryforward may be subject to an annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended and similar state provisions.

There are no significant items determined to be unrecognized tax benefits taken or expected to be taken in a tax return, in accordance with ASC 740 “Income Taxes” (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements, that have been recorded on the Company’s financial statements for the period ended December 31, 2017. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.

Additionally, ASC 740 provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the period ended December 31, 2017.

The federal and state tax returns for the years ended December 31, 2017, 2016, and 2015 are currently open for examination under the applicable federal and state income tax statues of limitations.