Pure Cycle Corporation 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

Aug. 31, 2018

NOTE 10 – INCOME TAXES

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 assets as of August 31 are as follows:

	For the Fiscal Years Ended August 31,
	2018			2017
Deferred tax assets:
Net operating loss carryforwards	$	2,009,800		$	2,893,600
AMT credit carryforward		282,000			—
Deferred revenue		28,600			316,400
Depreciation and depletion		(104,900	)		289,200
Other		80,500			88,000
Valuation allowance		(2,014,000	)		(3,587,200	)
Net deferred tax asset	$	282,000		$	—

The Company has recorded a valuation allowance against the deferred tax assets as it is more likely than not that all or some portion of specific deferred tax assets will not be realized, primarily due to the fact that the Company has generated a cumulative net loss position for the 2018 and 2017 fiscal years.

Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following for the fiscal years ended August 31:

	For the Fiscal Years Ended August 31,
	2018			2017			2016
Expected benefit from federal taxes at statutory rate of 21% and 34% for the years 2017 and 2016	$	34,100		$	(571,500	)	$	(420,300	)
State taxes, net of federal benefit		4,600			(55,500	)		(40,700	)
Permanent and other differences		97,800			90,300			84,500
Change in tax rate		1,196,464			—			—
NOL true up		17,589			—			—
Temporary difference true up		240,352			—			—
AMT credit carryforward		(282,000	)		—			—
Other		(17,705	)		—			—
Change in valuation allowance		(1,573,200	)		536,700			376,500
Total income tax expense / (benefit)	$	(282,000	)	$	—		$	—

At August 31, 2018, the Company has $8.2 million of net operating loss carryforwards available for income tax purposes, which expire between fiscal 2032 and 2038.

No net operating loss carryforwards expired during the fiscal year ended August 31, 2018, 2017 or 2016.

The Tax Act reduced the Company’s corporate federal tax rate from 34% to 21% effective January 1, 2018. As a result, the Company is required to re-measure its deferred tax assets and liabilities using the enacted rate at which it expects them to be recovered or settled. The effect of this re-measurement is recorded to income tax expense (benefit) in the year the tax law is enacted. The Company’s deferred tax asset and full valuation allowance was decreased by approximately $1.2 million as a result of the decreased corporate tax rate. In addition, the Company recorded a $282,000 AMT deferred tax asset for which it does not have a valuation allowance. The Company expects to receive the AMT deferred tax asset as a refund in future years. Most, if not all, of this credit will be refundable starting with the filing of the 2018 (fiscal year ending 2019) through 2021 (fiscal year ending 2022) tax returns, subject to limitations of Internal Revenue Code Section 382 (arises with ownership changes) and the sequestration limitation of the Balanced Budget Act of 1997. The Company will continue to evaluate the impact of the Tax Act and will record any resulting tax adjustments during 2019.