Pure Cycle Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

INCOME TAXES

3 Months Ended

Nov. 30, 2020

NOTE 12 – INCOME TAXES

For the three months ended November 30, 2020 and 2019, the Company recorded income tax expense of $0.3 million and $1.9 million. The net expense during the three months ended November 30, 2020 consisted of current income tax expense of $0.2 million and deferred income tax expense of $0.2 million. The net expense during the three months ended November 30, 2019 consisted of current income tax expense of $1.2 million and deferred income tax expense of $0.7 million.

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items. At November 30, 2020 the Company is estimating an annual effective tax rate of approximately 25%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. For the three months ended November 30, 2020 and 2019, the Company’s effective income tax rate was 24.6% and 24.7%

No taxes were paid during the three months ended November 30, 2020 and 2019, respectively.

Deferred income taxes reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liability as of November 30, 2020 and August 31, 2020 are as follows:

	November 30, 2020			August 31, 2020
Deferred tax assets (liabilities):	(In thousands)
Net operating loss carryforwards	$	—		$	23
Accrued compensation		33			167
Deferred revenues		76			89
Depreciation and depletion		(1,672	)		(1,701	)
Non-qualified stock options		505			491
Other		46			45
Net deferred tax liability	$	(1,012	)	$	(886	)

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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