YORK WATER CO Income Taxes Disclosure

14.  Income Taxes

Income before income taxes by jurisdiction consists of:

The provisions for income taxes consist of:

The Company paid (received) cash income taxes as follows:

A reconciliation of the statutory Federal tax provision to the total provision follows:

		2025								2024
Statutory Federal tax provision		$	4,041				21.0	%		$	4,552				21.0	%
State and local income taxes, net of Federal benefit			(267	)			(1.4	)%			244				1.1	%
Foreign taxes			–				0.0	%			–				0.0	%
IRS TPR deduction			(4,183	)			(21.7	)%			(3,315	)			(15.3	)%
Tax-exempt interest			(41	)			(0.2	)%			(33	)			(0.1	)%
Amortization of investment tax credit			(38	)			(0.2	)%			(36	)			(0.2	)%
Amortization of excess accumulated deferred income taxes on accelerated depreciation			(183	)			(1.0	)%			(196	)			(0.9	)%
Life insurance			(197	)			(1.0	)%			(19	)			(0.1	)%
Change in enacted state tax rate			20				0.1	%			21				0.1	%
Effect of cross-border tax laws			–				0.0	%			–				0.0	%
Change in valuation allowance			–				0.0	%			–				0.0	%
Change in unrecognized tax benefits			–				0.0	%			–				0.0	%
Other nondeductible items, net			32				0.2	%			132				0.6	%
Total income tax expense (benefit)		$	(816	)			(4.2	)%		$	1,350				6.2	%

The Company’s effective tax rate differs from the statutory Federal corporate income tax rate of 21% primarily due to the following items:

State and local income taxes, net of Federal benefit, decreased the effective tax rate in 2025 and increased the effective tax rate in 2024.  The change reflects the increase in the level of eligible asset improvements expensed for tax purposes under the IRS TPR each period.

The Company filed for a change in accounting method under the IRS TPR effective in 2014.  Under the change in accounting method, the Company is permitted to deduct the costs of certain asset improvements that were previously being capitalized and depreciated for tax purposes as an expense on its income tax return.  The Company was permitted to make this deduction for prior years (the “catch-up deduction”) and for each year going forward (the “ongoing deduction”).  As a result of the catch-up deduction, income tax benefits of $3,887 were deferred as a regulatory liability.  After receiving approval from the PPUC in a rate order, the Company began to recognize the catch-up deduction, recorded as a regulatory liability, over 15 years beginning March 1, 2019.  As a result, the Company recognized $259 in income taxes during each of the years ended December 31, 2025 and 2024.  As a result of the ongoing deduction, the net income tax benefits of $3,924 and $3,056 for the years ended  December 31, 2025 and 2024, respectively, reduced income tax expense and flowed through to net income.  The ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense, and a reduction in the amount of income taxes currently payable.  Both the ongoing and catch-up deductions result in increases to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions.

The 2017 Tax Act, among other things, reduces the federal statutory corporate tax rate for tax years beginning in 2018 from 34% to 21%, treats customers’ advances for construction and contributions in aid of construction as taxable income, eliminates certain deductions, and eliminates bonus depreciation on qualified water and wastewater property.  This resulted in the remeasurement of the federal portion of the Company’s deferred taxes as of December 31, 2017 to the 21% rate.  The effect was recognized in income for the year ended December 31, 2017 for all deferred tax assets and liabilities except accelerated depreciation.  Under normalization rules applicable to public utility property included in the 2017 Tax Act, the excess accumulated deferred income taxes on accelerated depreciation is recorded as a regulatory liability.  The regulatory liability is a temporary difference, so a deferred tax asset is recorded including the gross-up of revenue necessary to return, in rates, the effect of the temporary difference.  The Company is recognizing the excess accumulated deferred income taxes on accelerated depreciation, recorded as a regulatory liability, over the remaining useful life of the underlying assets.  As a result, the Company recognized $183 and $196 in income taxes for the years ended December 31, 2025 and 2024, respectively.  In November 2021, the 2021 Infrastructure Act repealed the tax treatment of customers’ advances for construction and contributions in aid of construction made after December 31, 2020.

The benefit from life insurance increased in 2025 as compared to 2024 due to the non-recurring gain on life insurance recorded as a result of death benefits from life insurance policies which is exempt from income taxes.

On July 8, 2022, the Pennsylvania budget for the fiscal year ending June 30, 2023 was signed into law.  A provision within the tax code bill included with the budget provides for an annual phase-down of the Pennsylvania corporate net income tax rate of one percentage point in the first year beginning January 1, 2023 from 9.99% to 8.99%, and a one-half percentage point each year thereafter until it reaches 4.99% beginning January 1, 2031.  The Company has remeasured the state portion of the Company’s deferred income taxes.  The effect, net of the federal benefit, of $20 and $21 was recognized in income for the years ended December 31, 2025 and 2024, respectively.  Deferred income taxes for differences that are recognized for ratemaking purposes on a cash or flow-through basis were remeasured with offsetting changes to regulatory assets and liabilities on the balance sheet as of December 31, 2025 and 2024.  The Company expects any savings in its Pennsylvania current income taxes to be returned to its customers through the rate making process or as a future negative surcharge on their bills.

The tax effects of temporary differences between book and tax balances that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2025 and 2024 are summarized in the following table:

In accordance with accounting standards, the net deferred tax liability is classified as a noncurrent deferred income tax liability on the balance sheets.

The Company has a federal tax loss carryover of $1,375.  This carryover has an indefinite life.  The Company has Pennsylvania tax loss carryovers of $3,543.  If not used, these carryovers will expire between 2042 and 2045.  The Company has contribution carryovers of $192.  If not used, these carryovers will expire between 2027 and 2030.

No valuation allowance was required for deferred tax assets as of December 31, 2025 and 2024.  In assessing the value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.  Based upon expected future taxable income and the current regulatory environment, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

The Company determined that there were no uncertain tax positions meeting the recognition and measurement test of the accounting standards recorded in the years that remain open for review by taxing authorities, which are 2022 through 2024 for both federal and state income tax returns.  The Company has not yet filed tax returns for 2025.  The Company believes that it has fully complied with any changes pursuant to the 2017 Tax Act, the 2021 Infrastructure Act, and the OBBBA and has not taken any new positions in its 2025 income tax provision.

The Company’s policy is to recognize interest and penalties related to income tax matters in other expenses.  The Company paid no interest or penalties for the years ended December 31, 2025 and 2024.