OFFICE OF COUNSEL GUIDANCE
Regarding the Net Deferred Tax Liability Deduction

Corporation Business Tax

This publication provides guidance on the calculation of the net deferred tax liability deduction provided in Section 141 of P.A. 15-244, as amended by Section 145 of P.A. 15-5 (June Spec. Sess.).  This guidance is intended to assist publicly traded companies in the preparation of their 2015 year-end financial statements and is binding on the Department of Revenue Services (DRS) until superseded or modified by a change in statute, regulation, court decision, ruling or other formal publication.  The DRS will update this guidance as it receives additional questions.  Any information added after the initial publication will include the date on which the information was added.

Question 1: What is the Net DTL Deduction?

Legislation enacted in 2015 requires companies to calculate their Corporation Business Tax on a combined unitary basis for income years beginning on or after January 1, 2016.  Such legislation is found in Sections 139 and 140 of P.A. 15-244 and the amendments thereto that were passed in the 2015 June and December Special Sessions (“Unitary Legislation”).

As a result of the Unitary Legislation, certain taxpayers may need to adjust deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) reported on their financial statements.  Combined groups, as defined in the Unitary Legislation, that include publicly traded companies are eligible for a deduction if their deferred tax positions are negatively impacted by the Unitary Legislation (“Net DTL Deduction”).  As such, a combined group may claim the Net DTL Deduction if the Unitary Legislation results in an increase to its net DTL, a decrease to its net DTA or causes its net DTA to become a net DTL.  The Net DTL Deduction is equal to the amount necessary to offset the balance sheet impact of such changes and may be taken in seven equal installments over a seven year period beginning with income year 2018.

Question 2: How is the Net DTL Deduction calculated?

First, the combined group must determine the total DTAs and DTLs of all of its members as of the close of business on December 31, 2015, excluding the impact associated with the Unitary Legislation.  As a result, such DTAs and DTLs will reflect all legislation enacted during the 2015 Connecticut legislative sessions other than the Unitary Legislation.  If the resulting DTAs are greater than DTLs, the group has a net DTA.  If the resulting DTLs are greater than DTAs, the group has a net DTL.  The group must determine the amount of the resulting net DTA or net DTL in this first step.  

Second, the combined group must determine its total DTAs and DTLs as of December 31, 2015 when all legislation enacted during the 2015 Connecticut legislative sessions, including the Unitary Legislation, is considered.  Again, if the resulting DTAs are greater than DTLs, the group has a net DTA.  If the resulting DTLs are greater than DTAs, the group has a net DTL.  The group must determine the amount of the resulting net DTA or net DTL in this second step.

Next, the group must compare the amounts of its net DTA and/or net DTL from step one and step two.  If, from step one to step two, there is an increase to the net DTL, a decrease to the net DTA or a change from a net DTA to a net DTL, the combined group is entitled to the Net DTL Deduction equal to the amount necessary to offset the balance sheet impact of such changes (“Unitary Deferred Tax Impact”).  The Unitary Deferred Tax Impact equals:

• If there is a net DTL in both step 1 and step 2, net DTL in step 2 minus net DTL in step 1;
• If there is a net DTA in both step 1 and step 2, net DTA in step 1 minus net DTA in step 2; or
• If there is a net DTA in step 1 and a net DTL in step 2, net DTA in step 1 plus net DTL in step 2.

To convert the Unitary Deferred Tax Impact to the annual Net DTL Deduction amount, such Adjustment should be divided by 7.5%, the Corporation Business Tax rate.  This resulting amount should be further divided by the Connecticut unitary net income apportionment fraction that was used by the combined group in the calculation of its DTAs and DTLs in step two above.  Except as otherwise specifically provided in statute, combined groups should use the single sales factor to calculate their apportionment fractions.

The result of this equation represents the total Net DTL Deduction available over the seven year period beginning in income year 2018.  Divide this amount by seven to arrive at the annual Net DTL Deduction amount.

Question 3: May combined groups that prepare their financial statements in accordance with IFRS claim the Net DTL Deduction?

Yes.  Combined groups that have members that are publicly traded companies, including affiliated corporations participating in the filing of a publicly traded company’s financial statements prepared in accordance with generally accepted accounting principles, are eligible to claim the Net DTL Deduction.  Generally accepted accounting principles include, but are not limited to, U.S. Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS). 

Question 4: What must a combined group do to claim the Net DTL Deduction?

On or before July 1, 2017, a combined group must file with DRS a statement and supporting calculations that specify the amount of the Net DTL Deduction the group claims.  DRS will issue forms and instructions on how to file such statement at a later date.  Failure to file this statement by July 1, 2017 results in a loss of the deduction.

Additional Questions Regarding the Net DTL Deduction: Send an e-mail to the DRS Office of Counsel at legal.division@po.state.ct.us

TTY, TDD, and Text Telephone users only may transmit inquiries anytime by calling 860-297-4911.

For Forms and Publications: Visit the DRS website.

OCG-2
Net Deferred Tax Liability Deduction
Corporation Business Tax
Issued: 1/7/2016