New Jersey Issues Technical Bulletin on Net Deferred Tax Liability Deduction

March 2020

SUMMARY

On February 24, 2020, New Jersey issued TB-96, Net Deferred Tax Liability Deduction and Combined Returns.  New Jersey enacted mandatory combined reporting for privilege periods ending on or after July 31, 2019.  The shift from separate reporting to combined reporting could adversely affect certain companies.  To mitigate those situations, the legislation included a special ASC-740 relief deduction.  The deduction is available to publicly-traded companies and their affiliates whose deferred tax positions are negatively affected by the switch to combined reporting.  To claim the deduction, taxpayers must complete Form DT-1 on or before July 1, 2020.
 
The bulletin largely restates the applicable deduction statute, N.J.S.A. 54:10A-4(k)(16), included in the legislation enacting mandatory combined reporting.  TB-96 also includes an FAQ Section, which is reprinted at the end of this alert.
 

DETAILS

Mandatory Combined Reporting and Net Deferred Tax Liability Deduction (NDTLD)
For privilege periods ending on or after July 31, 2019, New Jersey requires mandatory unitary combined reporting. See BDO’s previous two alerts from July 2018 and January 2019 discussing New Jersey’s adoption of mandatory unitary combined reporting.  Switching from separate reporting to combined reporting can negatively impact a taxpayer’s deferred tax position for a variety of reasons, with perhaps the most obvious reasons being an increased state tax base or an increased apportionment factor resulting from the taxpayer filing a New Jersey corporation business tax return that includes the income and factors of other unitary affiliates.
 
To alleviate the negative impact on a taxpayer’s deferred tax position, the New Jersey legislation included a net deferred tax liability deduction (NDTLD).  If the change to combined reporting results in an aggregate increase to the members’ net deferred tax liability, or an aggregate decrease to the members’ net deferred tax asset, then the combined group is entitled to a NDTLD.  Only publicly traded companies are eligible for the NDTLD.  Privately held companies are not eligible.
 
When calculating the NDTLD, the computation must be based on the change that would result from the imposition of the unitary reporting provisions.  The statute and TB-96 make it clear that the NDTLD cannot be adjusted as a result of subsequent events, such as any disposition or abandonment of assets or the change to market-based sourcing.  The overall deferred tax impact will then be converted to the “annual deferred tax deduction.”  Taxpayers will use one-tenth of the deduction per year, over a ten-year period, beginning on or after January 1, 2023.
 
Eligible combined groups must complete Form DT-1 on or before July 1, 2020, to claim the deduction.  According to TB-96, the form will be available by April 1, 2020.  The New Jersey Division of Taxation (Division) stressed that Form DT-1 must be submitted electronically through the New Jersey Online Notice Response Service, and that the Division will not accept paper forms through the mail.  The statute clearly indicates that the statement must include the total amount of the deduction claimed by the combined group, and that no deduction will be allowed for any privilege period except to the extent claimed on such timely filed statement.
 
Q & A on Net Deferred Tax Liability Deduction
The Division has received several questions regarding the Net Deferred Tax Liability Deduction (NDTLD), which are answered below:
 
1. Can a privately held company apply for the NDTLD?
No. Privately held companies are not eligible for the NDTLD. The law specifies that to be eligible for the deduction, a company must be publicly traded, listed on a stock exchange or over-the-counter market, and file financial statements in accordance with generally accepted accounting principles (GAAP) (defined above).
 
2. I am an owner of a closely held group of companies that is now required to file mandatory combined returns, am I eligible for the NDTLD?
No, only publicly traded companies that file financial statements in accordance with U.S. GAAP or international financial reporting standards (IFRS) are eligible. Individuals and privately held combined groups are not eligible for the NDTLD.
 
3. Are there specific stock exchanges or over-the-counter markets on which a company must be listed to qualify for the NDTLD?
A company can be listed on any stock exchange or over-the-counter market that is regulated by a U.S. regulatory authority or a regulatory authority of the foreign nation that has a reciprocal agreement with the U.S. government or U.S. regulatory authority.
 
4. Is the surtax included in the computation of the NDTLD?
Yes. The surtax is part of the overall tax rate of the combined group so it must be included when calculating the NDTLD.
 
5. Is the impact of changing to market-based sourcing included in the computation of the NDTLD?
No. The NDTLD was designed to mitigate the financial impact of New Jersey’s shift to combined reporting. The change to market-based sourcing is not a result of combined reporting. Therefore, it cannot be included in the NDTLD calculation.
 
6. The parent corporation files financial statements in accordance with IFRS and is listed on a foreign stock exchange that has a reciprocal agreement with the U.S. government. The U.S. subsidiaries are required to file a mandatory unitary combined return with New Jersey and are included in the parent corporation’s financial statements filed with the foreign nation. Are the U.S. subsidiaries eligible for the NTDLD?
Yes, because the subsidiaries are affiliates of the parent corporation that files financial statements in accordance with IFRS and the parent corporation is listed on a relevant stock exchange.
 
7. The parent corporation files financial statements in accordance with U.S. GAAP and is listed on the New York Stock Exchange. The parent corporation is not unitary with its subsidiaries. The subsidiaries are required to file a mandatory unitary combined return for New Jersey Corporation Business Tax purposes. The combined group is included in the parent corporation’s financial statements filed with the U.S. Securities and Exchange Commission (SEC). Is the combined group eligible for the NTDLD?
The Division is in the process of drafting regulations addressing the topics covered by this Technical Bulletin.
 

BDO INSIGHTS

  • Only publicly-traded companies are eligible to claim the deduction.  Privately held companies are not eligible for the deduction.
  • To claim the deduction, taxpayers must complete Form DT-1, New Jersey Corporation Business Tax Statement of Net Deferred Tax Liability Deduction, on or before July 1, 2020.  That deadline will approach quickly, so taxpayers should consult with BDO tax professionals soon, as calculations will be required.
  • The requirements listed in the statute and TB-96 must be followed for combined groups to claim and take the deduction.  According to TB-96, the Division will promulgate regulations on calculating and claiming the NDTLD.