As a result of mandatory unitary tax reporting legislation enacted in 2015, certain Connecticut taxpayers have a right to claim a net deferred tax liability deduction over a seven-year period beginning with income year 2018. To claim the deduction, eligible taxpayers must submit Form CT-DTLD, Statement of Net Deferred Tax Liability Deduction, with the Connecticut Department of Revenue Services (DRS) by July 3, 2017. Failure to file this statement by July 3, 2017, will result in a loss of the Net Deferred Tax Liability Deduction. No extensions will be granted to file the statement.

Background

As indicated in prior Alerts (see Tax Alert 2015-1256 and Tax Alert 2015-2348), 2015 legislation enacted in Connecticut under HB 7061 and SB 1502 (Unitary Legislation) requires companies to calculate their Corporation Business Tax on a unitary combined reporting basis, effective for tax years beginning on or after January 1, 2016. The Unitary Legislation adopted a provision providing eligible taxpayers with a deduction for a net deferred tax liability financial statement impact (Conn. Gen. Stat. Sections 12-218e and 12-218f). As indicated above, the deduction is claimed by filing Form CT-DTLD, Statement of Net Deferred Tax Liability Deduction, with the DRS. The deadline for submitting the statement and claiming the deduction is July 3, 2017. DRS is not granting extensions of the deadline.

As a result of the Unitary Legislation, taxpayers may have been required to adjust their deferred tax assets and/or liabilities on their financial statements. The deduction is allowed for publicly traded companies if adoption of the Unitary Legislation results in an increase to a combined group's net deferred tax liability, a decrease to its net deferred tax asset, or causes its net deferred tax asset to become a deferred tax liability.

The amount of the Net Deferred Tax Liability Deduction is equal to the amount necessary to offset the potential financial statement hardship associated with adopting Unitary Legislation. The deduction may be taken in equal, annual installments over a seven-year period beginning with income year 2018. Special Notice 2016(1) and OCG-2 have been issued by DRS and provide additional details and examples for computing the deduction.

The calculation of a taxpayer's Connecticut deferred tax assets and liabilities as of December 31, 2015, should include all legislation enacted during the 2015 Connecticut legislative sessions other than the Unitary Legislation. The adoption of 2015 Conn. Pub. Acts 1, Section 40 (Dec. Spec. Sess.) (Apportionment Legislation) established a single-sales factor apportionment methodology applicable to most taxpayers not subject to special industry-specific apportionment rules. A taxpayer's Connecticut deferred tax asset or liability as of December 31, 2015 should include adoption of the Apportionment Legislation because it was enacted in 2015. As a result, the financial statement impact of the Apportionment Legislation is excluded from the balance of the Net Deferred Tax Liability Deduction. In addition, market-based sourcing rules also are excluded from the balance of the Net Deferred Tax Liability Deduction, as this legislation was not enacted until 2016.

Implications

The Net Deferred Tax Liability Deduction is designed to mitigate the effect on the deferred assets/liabilities of taxpayers in connection with Connecticut's move to unitary combined reporting. The form, however, must be completed in order for a taxpayer to claim the deduction. While fairly straightforward to complete, the form should also show the taxpayer's supporting calculations. Presumably, summary calculations only showing the requested information should be sufficient to support the information on the return. Taxpayers should revisit their deferred calculations as of December 31, 2015, and recalculate these balances on a combined unitary basis in Connecticut. Note that the form asks for the taxpayer's combined apportionment percentage on line 5. This reporting is required in order to gross up the amount of the change in the deferred balance so that the deduction fully offsets the effect of the combined legislation on a taxpayer's deferred items.

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