12. Income Taxes

The domestic and foreign components of pre-tax loss were as follows:

The components of our income tax (benefit) expense were as follows:

The following is a reconciliation of the statutory federal income tax rate to our effective tax rate:

The significant components of net deferred tax balances were as follows:

Income tax expense was $13.6 million for the year ended December 31, 2021, compared to a tax expense of $18.7 million for the year ended December 31, 2020.

On July 22, 2020 the U.K. Finance Bill 2020 was enacted, increasing the U.K. tax rate from 17% to 19% effective April 1, 2020. On June 10, 2021, the U.K. Finance Act 2021 was enacted to further increase the tax rate from 19% to 25% effective April 1, 2023. These changes to the U.K. tax rate resulted in an increase to our U.K. net deferred tax assets (before valuation allowance) of $188.9 million and $39.7 million for the periods ending December 31, 2021 and 2020, respectively, both of which were fully offset by an increase in our valuation allowance.

Prior to January 1, 2021, the separation of the Convertible Notes into liability and equity components resulted in a temporary difference for which a net deferred tax liability, with an offsetting valuation allowance, was recognized in additional paid-in capital. Upon the adoption of ASU 2020-06 on January 1, 2021, the existing temporary difference on the Convertible Notes was eliminated, which resulted in the derecognition of a $138.8 million deferred tax liability. Both the $138.8 million reduction to deferred tax liability and the offsetting increase to our valuation allowance were recorded to additional paid-in capital and accumulated deficit under the modified retrospective approach.

As of December 31, 2021, we had an immaterial amount of unremitted earnings related to certain foreign subsidiaries. We intend to continue to reinvest these foreign earnings indefinitely and do not expect to incur any significant taxes related to such amounts.

As of December 31, 2021, we had accumulated U.S. federal and state net operating loss carryforwards of $7.5 billion and $4.4 billion, respectively. Of the $7.5 billion of federal net operating loss carryforwards, $1.6 billion was generated before January 1, 2018 and is subject to a 20-year carryforward period. The remaining $5.9 billion can be carried forward indefinitely but is subject to an 80% taxable income limitation. The pre-2018 federal and certain state net operating loss carryforwards will begin to expire in 2031 and 2025, respectively. As of December 31, 2021, we had $3.2 billion of U.K. net operating loss carryforwards that can be carried forward indefinitely; however, use of such carryforwards in a given year is generally limited to 50% of such year’s taxable income. As of December 31, 2021, we had accumulated U.S. federal and state research tax credits of $476.6 million and $292.8 million, respectively. The U.S. federal research tax credits will begin to expire in 2032. The U.S. state research tax credits do not expire.

We recognize valuation allowances on deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. We had valuation allowances against net deferred tax assets of $3.6 billion and $2.3 billion as of December 31, 2021 and 2020, respectively. In 2021, the increase in the valuation allowance was primarily attributable to a net increase in our deferred tax assets resulting from the loss from operations, the U.K. tax rate increase, windfall tax benefits from share-based compensation, and the recognition of valuation allowance in additional paid-in-capital related to the adoption of ASU 2020-06 pertaining to the Convertible Notes.

Uncertain Tax Positions

The following table summarizes the activity related to our gross unrecognized tax benefits during the years ended December 31, 2021 and 2020:

The total amount of gross unrecognized tax benefits, including related interest and penalties, was $469.7 million and $345.3 million as of December 31, 2021 and 2020, respectively.

Substantially all of the unrecognized tax benefit was recorded as a reduction in our gross deferred tax assets, offset by a corresponding reduction in our valuation allowance. We have net unrecognized tax benefits of $15.9 million and $11.8 million that is included in other liabilities on our consolidated balance sheet as of December 31, 2021 and 2020, respectively. Assuming there continues to be a valuation allowance against deferred tax assets in future periods when gross unrecognized tax benefits are realized, this would result in a tax benefit of $15.9 million within our provision of income taxes at such time.

Our policy is to recognize interest and penalties associated with tax matters as part of the income tax provision and include accrued interest and penalties with the related income tax liability on our consolidated balance sheet. During the year ended December 31, 2021, interest expense recorded related to uncertain tax positions was not material.

The income taxes we pay are subject to review by taxing jurisdictions globally. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We believe that our estimate has adequately provided for these matters. However, our future results may include adjustments to estimates in the period the audits are resolved, which may impact our effective tax rate.

Tax years ending on or after December 31, 2012 are subject to examination in the U.S., and tax years ending on or after December 31, 2020 are subject to examination in the U.K. We are currently under examination by the U.S. Internal Revenue Service for the tax year ending December 31, 2018.