Massachusetts Finally Implements Deferred Tax Liability Deduction

April 2022

BY

Thomas LeonardoManaging Director, State & Local Tax

Matthew DymentManaging Principal, State & Local Tax

Massachusetts corporate taxpayers can claim the state’s deferred tax liability deduction (DTL deduction) on their combined income tax returns, starting with the 2021 tax year. The deduction was originally enacted as part of the 2008 Session Laws that also adopted mandatory unitary combined reporting for tax years beginning on or after January 1, 2009. The shift to unitary combined reporting increased net deferred tax liability for certain publicly traded companies. In response, Massachusetts enacted the DTL deduction to mitigate the financial reporting impact on taxpayers as a result of this requirement.

However, the effective date of the DTL deduction was delayed multiple times through subsequent legislation, first to tax years beginning in 2016, then to tax years beginning in 2021. The deferral of the deduction expired in 2021 without further extension, thereby allowing corporate taxpayers to finally claim the deduction on their Massachusetts combined income tax returns (Form 355U).
 

 Claiming the Massachusetts DTL Deduction

 
A taxpayer must have filed a DTL Deduction Statement with the Massachusetts Department of Revenue (Department) by June 30, 2009, to be eligible for the DTL deduction. This filing is used to report the financial statement impact resulting from the change from separate to combined reporting in Massachusetts. Any taxpayer that did not submit a DTL Deduction Statement by this date does not qualify for the DTL deduction. Additionally, taxpayers are not allowed to amend their DTL Deduction Statements after July 1, 2009, to state a larger deduction. Nevertheless, a taxpayer must amend its DTL Deduction Statement if additional information is obtained that lowers the DTL deduction amount.

Further, eligibility is only extended to publicly traded companies and affiliated corporations that participate in the publicly traded company’s financial statements prepared in accordance with GAAP as of July 3, 2008. Any corporation that joins the Massachusetts unitary group after July 3, 2008, will not qualify for the DTL deduction.

For tax years beginning in 2021, this deduction can be taken over a 30-year period. The maximum amount of the deduction that can be taken per year is one-thirtieth of the amount reported on the DTL Deduction Statement. The deduction must also be apportioned using the corporation’s Massachusetts apportionment percentage for each of the tax years that the DTL deduction is taken.

The deduction should be reported on Schedule U-E, line 24 starting on the tax year 2021 return. This deduction cannot reduce taxable income below zero and any excess amounts cannot be carried forward. The DTL deduction also must be utilized before any other deduction, including net operating loss and dividends received deductions. The Commissioner of Revenue also retains the authority to review or determine the correct amount of any DTL deduction. If a taxpayer does not provide the requested records necessary for this review, then the DTL deduction will be denied.

A Schedule TDS (Taxpayer Disclosure Statement) should also be included with the Massachusetts corporate tax return to corroborate the DTL deduction for every taxable year it is claimed. This schedule must also include a detailed worksheet showing the DTL calculation.