On Feb. 24, 2020, the New Jersey Division of Taxation (Division) issued Technical Bulletin TB-96 (Bulletin), addressing the mechanics of the new Net Deferred Tax Liability Deduction (NDTLD) for eligible publicly traded companies.1 This guidance follows sweeping tax reform legislation enacted in 2018, which imposed mandatory combined reporting for tax periods ending on or after July 31, 2019, and implemented the NDTLD for adversely affected public companies.2 The deduction must be claimed using Form DT-1, which must be filed electronically on or before July 1, 2020.
New Jersey’s tax reform legislation included the NDTLD, a special ASC 740 relief deduction allowing publicly traded corporations to minimize the potentially negative effects of the transition to mandatory combined reporting on deferred tax positions for financial statement reporting purposes.3 The deduction is limited only to publicly traded companies and their affiliates.4 Such companies must prepare their financial statements in accordance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). Public companies are eligible for the deduction if the transition to combined reporting increases the taxpayer’s aggregate net deferred tax liability or decreases the taxpayer’s aggregate net deferred tax asset.5
Additional guidance on the NDTLD
The Bulletin provides the Division’s definitions for purposes of the NDTLD, in addition to responses to common questions the Division has received regarding the deduction. The Division addresses specific inquiries regarding which companies are eligible for the deduction, confirms that the temporary Corporation Business Tax (CBT) surtax6 is included in the tax rate used for the computation of the NDTLD, and concludes that any market-based sourcing impact is not included in the computation. Per Form DT-1, the statement on which taxpayers calculate their NDTLD, the net deferred tax asset or liability should be computed as of the last day of the tax year ending prior to July 31, 2019, with and without the impact of the transition to unitary combined reporting.7 The form instructions specify that these amounts should be the same amounts that were reported on the taxpayer’s financial statements. If for whatever reason they are not, the amounts should be calculated in accordance with GAAP or IFRS and included as a spreadsheet attachment.
The guidance specifies that the total deduction is taken over a 10-year period beginning on or after Jan. 1, 2023. The deduction is calculated by determining 1/10th of the amount necessary to offset the increase in the net deferred tax liability and/or the decrease in the net deferred tax asset.8 The deduction taken cannot be the result of any subsequent events, such as the abandonment and disposition of assets, and is taken without regard to the federal income tax effect or basis of the asset.
Form DT-1 filing deadline
New Jersey combined groups meeting the eligibility requirements for the NDTLD must complete Form DT-1 on or before July 1, 2020, in order to claim the deduction. The form must be submitted electronically through the New Jersey Online Response Service, which is a secure document upload function. The Division will not accept paper forms via mail, and will not accept untimely filed statements. Because the July 1 deadline is statutory, no extensions of time to file Form DT-1 are currently being granted, despite the fact that numerous New Jersey tax deadlines recently have been extended due to the effects of COVID-19.
In order for companies to benefit from the NDTLD and reflect this in their financial statements, they must file the required Form DT-1 on or before the stated deadline of July 1, 2020, even though the deduction will not apply until Jan. 1, 2023. The guidance specifically states that paper forms will not be accepted, so taxpayers must be cautious to properly submit the form in order to avoid permanent loss of the deduction. While the deduction should have initially been reflected for financial reporting purposes during the third quarter of 2018 when the New Jersey tax reform legislation was originally enacted, the issuance of the Bulletin allows taxpayers to revise prior calculations of the deduction in the first quarter of 2020, the period in which the Bulletin was released, based on the additional guidance regarding the computation of the NDTLD. For taxpayers that previously recorded the benefit, but expect a material financial statement impact as a result of forgoing the deduction, the removal of the benefit would be considered a second quarter 2020 event for taxpayers anticipating that they will not file Form DT-1, or a third quarter 2020 event for taxpayers missing the July 1 filing deadline.
Other states that recently adopted mandatory combined reporting, including Connecticut and Kentucky, have likewise offered a similar deduction to public companies.9 While states are by no means required to provide public companies a NDTLD in order to help mitigate the negative effects of combined reporting on financial statements, many states that did so subsequently delayed the applicable deduction period. For example, Connecticut recently transitioned to unitary combined reporting for income years beginning on or after Jan. 1, 2016. In conjunction with this transition, publicly traded members of a combined group were allowed to take a NDTLD in equal increments over a period of seven years in the group’s first income year beginning in 2018.10 Shortly after enactment, Connecticut made technical legislative amendments that delayed the first year the deduction may be claimed from 2018 to 2021, and changed the deduction period from seven to 30 years.11 Connecticut’s modifications followed similar changes Massachusetts made to its NDTLD in 2015.12 Given the significant fiscal challenges states are currently facing, the appeal of giving taxpayers a deduction for financial statement purposes without actually having such deduction impact revenues is evident. It remains to be seen whether New Jersey will also consider delaying the deduction period when the time for actually taking the deduction on tax returns approaches.
1 N.J. Technical Bulletin TB-96, Net Deferred Tax Liability Deduction and Combined Returns, N.J. Division of Taxation, Feb. 24, 2020.
2 P.L. 2018, c.48; P.L. 2018, c.131, Laws 2018. For a detailed analysis of New Jersey’s 2018 tax overhaul, see GT SALT Alert: New Jersey Enacts Major Legislation Adopting Mandatory Combined Reporting, Market-Based Sourcing.
3 N.J. REV. STAT. § 54:10A-4(k)(16)(A).
4 TB-96 defines a “publicly traded company” as a company listed on a stock exchange or over-the-counter market.
5 N.J. REV. STAT. § 54:10A-4(k)(16)(B). “Net deferred tax liability” means deferred tax liabilities that exceed the deferred tax assets of the combined group, as computed in accordance with GAAP. “Deferred tax asset” refers to the deferred tax assets that exceed the deferred tax liabilities of the combined group as computed in accordance with GAAP.
6 New Jersey tax law imposes a temporary surtax on CBT taxpayers having New Jersey allocated taxable net income exceeding $1 million at a rate of 2.5% for the 2018 and 2019 tax years, and 1.5% for the 2020 and 2021 tax years. N.J. REV. STAT. § 54:10A-5.41.
7 Form DT-1, Statement of Net Deferred Tax Liability Deduction, N.J. Division of Taxation, March 30, 2020, published at https://www.state.nj.us/treasury/taxation/pdf/current/cbt/dt-1.pdf.
8 N.J. REV. STAT. § 54:10A-4(k)(16)(E).
9 CONN. GEN. STAT. § 12-218g(d); KY. REV. STAT. § 141.039(2)(d). For a discussion of Kentucky’s deferred tax liability deduction for publicly traded companies, see GT SALT Alert: Kentucky Enacts Legislation Repealing Bank Franchise Tax, Amending Combined Reporting and Expanding Sales Tax Nexus to Marketplace Providers.
10 CONN. GEN. STAT. § 12-218g(d).
11 S.B. 1503, Laws 2017. For further discussion, see GT SALT Alert: Connecticut Budget Revises Net Deferred Tax Liability Deduction Provisions.
12 Ch. 52 (H.B. 3671), § 2, Laws 2015.
Matthew DiDonato is a State and Local Tax (SALT) practice partner in the New York office and leads the Metro New York SALT practice. He has more than 18 years of public accounting, private industry and legal state and local tax experience.
Iselin, New Jersey
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Drew VandenBrul has over 26 years of experience as a state & local tax professional advising companies across all industries on complex Pennsylvania and multistate tax planning, tax controversy, transaction and compliance matters, including income, franchise, realty transfer and sales & use taxes.
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Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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