13. Income Taxes

For the year ended December 31, 2021, Lineage did not record a tax provision or deferred tax benefit. For the year ended December 31, 2020, Lineage recorded a $1.2 million deferred tax benefit for income taxes.

The domestic and foreign breakout of loss before net income tax benefit was as follows:

Income taxes differed from the amounts computed by applying the indicated current U.S. federal income tax rate to pretax losses from operations as a result of the following:

The primary components of the deferred tax assets and liabilities at December 31, 2021 and 2020 were as follows (in thousands):

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Lineage established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries. During the year ended December 31, 2021, Lineage had taxable income and therefore did not generate any indefinite lived deferred tax assets as tax provision benefit. As new indefinite lived deferred tax assets are generated, we will continue to book provision benefits until the deferred tax liability position is exhausted, barring any new developments.

As of December 31, 2021, Lineage has gross net operating loss carryforwards of approximately $155.6 million for federal purposes. As of December 31, 2021, Lineage’s foreign subsidiaries have net operating loss carryforwards of approximately $60.2 million which carryforward indefinitely.

As of December 31, 2021, Lineage has net operating losses of $151.8 million for state tax purposes.

As of December 31, 2021, Lineage has research tax credit carryforwards for federal and state tax purposes of $3.7 million and $5.8 million, respectively. These tax credits reflect the amounts for Lineage, Asterias and OrthoCyte as of December 31, 2021. For federal purposes, the credits generated each year have a carryforward period of 20 years. The federal tax credits expire in varying amounts between 2021 and 2041, while the state tax credits have no expiration period.

On August 5, 2020, Lineage began the liquidation of its foreign subsidiary BioTime Asia. At the time of the liquidation, BioTime Asia had an intercompany payable due to Lineage. For book purposes, the corresponding balances eliminate in consolidation. For federal purposes, the activities of their foreign subsidiaries are not included in the consolidated tax return. Accordingly, the payable was written off for tax purposes by Lineage, creating a $3.6 million bad debt deduction increasing its NOL carryover. For California, the activities of its foreign subsidiaries, including BioTime Asia, are included in the combined tax return. As such, the corresponding intercompany balances are eliminated.

On December 17, 2021, Lineage and its subsidiary, Cell Cure, entered into a Collaboration and License Agreement with Roche, wherein Lineage granted to Roche exclusive worldwide rights to develop and commercialize RPE cell therapies. Under the agreement Roche will pay Lineage a $50.0 million upfront payment. This payment was received in January of 2022 (see further discussion at Note 14).

During December 2021, in an intercompany transaction, Lineage acquired the economic rights to Cell Cure’s interest in certain intellectual property. This transaction generated a gain to Cell Cure of $31.7 million which was fully offset by net operating loss carryforwards in Israel. For book and California income tax purposes, this transaction eliminates in consolidation. For federal income tax purposes, the activities of our foreign subsidiaries are not included in the consolidated tax return. However, under the provisions of GILTI the profits of our foreign subsidiaries may be included, see further discussion below.

Beginning in 2018, the 2017 Tax Act subjects a U.S. stockholder to GILTI earned by certain foreign subsidiaries. In general, GILTI is the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets. The provision further allows a deduction of 50% of GILTI, however this deduction is limited to the company’s pre-GILTI U.S. income. For the year ended December 31, 2020, our foreign subsidiaries generated losses, as a result there was no inclusion. For the year ended December 31, 2021, Lineage’s combined foreign entities generated a profit arising from intercompany transactions. As a result, there was an inclusion of $24.8 million for GILTI purposes for 2021. The resulting net income for federal income tax purposes was fully offset by their federal net operating loss carryforwards.

Other Transactions and Related Impact on Income Taxes

The market value of the respective shares Lineage holds in OncoCyte and Asterias (through the merger date of March 8, 2019) creates a deferred tax liability to Lineage based on the closing price of the security, less the tax basis of the security Lineage has in such shares. The deferred tax liability generated by shares that Lineage holds as of December 31, 2021 and 2020, is a source of future taxable income to Lineage, as prescribed by ASC 740-10-30-17, that will more likely than not result in the realization of its deferred tax assets to the extent of those deferred tax liabilities. This deferred tax liability is determined based on the closing price of those securities as of December 31, 2021 and 2020.

Other Income Tax Matters

Internal Revenue Code Section 382 places a limitation (“Section 382 Limitation”) on the amount of taxable income that can be offset by NOL carryforwards after a change in control (generally greater than 50% change in ownership within a three-year period) of a loss corporation. California has similar rules. Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods.

Lineage files a U.S. federal income tax return as well as various state and foreign income tax returns. In general, Lineage is no longer subject to tax examination by major taxing authorities for years before 2016. Although the statute is closed for purposes of assessing additional income and tax in these years, the taxing authorities may still make adjustments to the NOL and credit carryforwards used in open years. Therefore, the statute should be considered open as it relates to the NOL and credit carryforwards used in open years.

Lineage may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. Based on Lineage’s assessment, no liabilities for uncertain tax positions should be recorded as of December 31, 2021 and 2020. Lineage’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

Lineage’s practice is to recognize interest and penalties related to income tax matters in tax expense. As of December 31, 2021 and 2020, Lineage has no accrued interest and penalties.