INCOME TAXES

6 Months Ended

Mar. 31, 2021

11. INCOME TAXES

ASC Topic 740, Income Taxes requires the use of an estimated annual effective tax rate for purposes of determining the income tax provision during interim reporting periods. In calculating its estimated annual effective tax rate, NJR considers forecasted annual pre-tax income and estimated permanent book versus tax differences. Adjustments to the effective tax rate and management's estimates will occur as information and assumptions change.

Changes in tax laws or tax rates are recognized in the financial reporting period that includes the enactment date, the date in which the act is signed into law.

NJR evaluates its tax positions to determine the appropriate accounting and recognition of potential future obligations associated with unrecognized tax benefits. A tax benefit claimed, or expected to be claimed, on a tax return may be recognized if it is more likely than not that the position will be upheld upon examination by the applicable taxing authority. Interest and penalties related to unrecognized tax benefits, if any, are recognized within income tax expense and accrued interest, and penalties are recognized within other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets.

The Company evaluates certain tax benefits that have been recorded in the financial statements for uncertainties. During fiscal 2019 the Company concluded that a portion of tax benefits were uncertain at this time. As a result, the Company recorded a reserve that was included in accrued taxes on the Unaudited Condensed Consolidated Balance Sheets. During fiscal 2021, a tax audit was completed and the positions that the prior tax reserves related to are now considered effectively settled and the tax reserve has been released. As a result of the change in the Company's method of accounting for ITCs from the flow through method to the deferral method, which was effective October 1, 2020, the settlement of the reserve was recorded as an adjustment to nonutility plant and equipment, at cost on the Unaudited Condensed Consolidated Balance Sheets.

The reserve for uncertain tax benefits is as follows:


(Thousands)	March 31, 2021		September 30, 2020
Balance at October 1,	$	4,930	$	4,930
Settlements	(4,930)		—
Balance at period end	$	—	$	4,930

The tax benefits related to fiscal tax years open to examination by the IRS may be subject to subsequent adjustments.

On March 27, 2020, the President of the U.S. signed the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes several business tax provisions which include, but are not limited to modifications of federal net operating loss carrybacks and deductibility, changes to prior year refundable alternative minimum tax liabilities, increase of limitations on business interest deductions from 30 percent to 50 percent of earnings before interest, taxes, depreciation, and amortization, technical corrections of the classification of qualified improvement property making them eligible for bonus depreciation, increase of the limits on charitable contribution deductions from 10 percent to 25 percent of adjusted taxable income, modifications of the treatment of federal loans, loan guarantees, and other investments, suspension of industry specific excise taxes, deferral of the company portion of OASDI, and implementation of a refundable employee retention tax credit.

The CARES Act provides for the delay in the required deposit of the employer portion of the OASDI payroll tax from the date of enactment through the end of 2020. Of the taxes that the Company can defer, 50 percent of the deferred taxes are required to be deposited by the end of 2021 and the remaining 50 percent are required to be deposited by the end of 2022. Additionally, The CARES Act provides a refundable tax credit, the employee retention tax credit, to certain employers who are ordered by a competent governmental authority to suspend or reduce business operations due to concern about the spread of COVID-19 or suffered a significant decline in the business during a calendar quarter during 2020 compared to the same calendar quarter during the previous year. As of March 31, 2021 and September 30, 2020, the Company deferred $5.1 million and $3.1 million, respectively, related to the employer portion of the OASDI tax.

On March 11, 2021, the President of the U.S. signed the American Rescue Plan Act of 2021, which is primarily an economic stimulus package. It also expanded the scope of Section 162(m) of the Internal Revenue Code, which imposes a $1 million deduction limit on compensation paid to covered employees from the top five officers to include the additional top five highest paid employees for tax years beginning after December 31, 2026.

Effective Tax Rate

The forecasted effective tax rates were 19.9 percent and 19.4 percent, for the six months ended March 31, 2021 and 2020, respectively.

To the extent there are discrete tax items that are not included in the forecasted effective tax rate, the actual effective tax rate may differ from the estimated annual effective tax rate. During the six months ended March 31, 2021, discrete items totaled $(145,000) related to excess tax expense associated with the vesting of share-based awards. During the six months ended March 31, 2020, discrete items totaled $2.7 million related to a revaluation of certain state deferred tax assets and liabilities as a result of a change in the New Jersey state apportionment factor and excess tax benefits associated with the vesting of share-based awards. NJR’s actual effective tax rate was 19.7 percent and 18.0 percent during the six months ended March 31, 2021 and 2020, respectively.

Other Tax Items

As of March 31, 2021 and September 30, 2020, the Company has federal income tax net operating losses of approximately $134.0 million. Federal net operating losses can generally be carried back two years and forward 20 years and will begin to expire in fiscal 2036, with the remainder expiring by 2038. The Company expects to exercise its ability to carryback federal net operating losses to offset taxable income in prior periods.

For the net operating losses it expects to carryback, the Company estimated the portion considered refundable and recorded receivables of approximately $22.8 million as of March 31, 2021 and September 30, 2020, as a component of other noncurrent assets on the Unaudited Condensed Consolidated Balance Sheets. Upon filing amended federal income tax returns to carryback its remaining federal net operating losses totaling $24.1 million, the Company will reduce its taxable income in those periods and recapture ITCs of the same amount that were previously utilized to offset taxable income.

In addition, as of March 31, 2021 and September 30, 2020, the Company has tax credit carryforwards of approximately $193.2 million and $195.2 million, respectively, which each have a life of 20 years. When the Company carries back the federal net operating losses noted above, it expects to recapture investment tax credits totaling $24.1 million. These recaptured tax credits are in addition to the $193.2 million and will be carried forward to offset future taxable income. The Company expects to utilize this entire carryforward prior to expiration, which would begin in fiscal 2034.

As of March 31, 2021 and September 30, 2020, the Company has state income tax net operating losses of approximately $442.4 million and $487.7 million, respectively. These state net operating losses have varying carry-forward periods dictated by the state in which they were incurred; these state carry-forward periods range from seven to 20 years and would begin to expire in fiscal 2021, with the majority expiring after 2035. The Company expects to utilize this entire carryforward, other than as described below.

As of March 31, 2021 and September 30, 2020, the Company has a valuation allowance of $17.6 million, which is primarily related to the recognition of state net operating loss carryforwards in New Jersey.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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