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INCOME TAXES
 12 Months Ended
Sep. 30, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES
13. INCOME TAXES

The income tax provision (benefit) from operations for the fiscal years ended September 30, consists of the following:
(Thousands)202120202019
Current:
Federal$651 $(2,164)$10,933 
State1,703 6,763 3,530 
Deferred:
Federal25,030 28,817 4,103 
State6,224 3,400 4,003 
Investment/production tax credits(322)(322)(4,129)
Income tax provision$33,286 $36,494 $18,440 
As of September 30, the temporary differences, which give rise to deferred tax assets (liabilities), consist of the following:
(Thousands)20212020
Deferred tax assets
Investment tax credits (1)
$225,036 $194,840 
Federal net operating losses (2)
— 24,091 
State net operating losses38,108 33,233 
Fair value of derivatives16,333 13,979 
Impairment of equity method investment15,395 — 
Postemployment benefits9,665 8,544 
Incentive compensation6,894 7,071 
Amortization of intangibles6,540 5,892 
Overrecovered natural gas costs1,540 7,244 
Allowance for doubtful accounts6,561 1,922 
Other6,140 448 
Total deferred tax assets$332,212 $297,264 
Less: Valuation allowance(23,613)(17,639)
Total deferred tax assets net of valuation allowance$308,599 $279,625 
Deferred tax liabilities
Property related items$(419,753)$(359,604)
Remediation costs(16,347)(10,207)
Investments in equity investees(21,739)(23,395)
Conservation incentive plan(3,309)(5,345)
Other(6,203)(6,639)
Total deferred tax liabilities$(467,351)$(405,190)
Total net deferred tax liabilities$(158,752)$(125,565)
(1)Includes approximately $814,000 and $898,000 for NJNG for fiscal 2021 and 2020, respectively, which is being amortized over the life of the related assets.
(2)See discussion of federal net operating loss utilization in the Other Tax Items section of this note.

A reconciliation of the U.S. federal statutory rate to the effective rate from operations for the fiscal years ended September 30, is as follows:
(Thousands)202120202019
Statutory income tax expense$31,747 $41,896 $29,898 
Change resulting from:
Investment/production tax credits(322)(322)(4,129)
Cost of removal of assets placed in service prior to 1981(5,366)(5,362)(6,349)
AFUDC equity(786)(4,933)(2,313)
State income taxes, net of federal benefit6,124 11,965 6,262 
NJ Unitary method change— (15,345)— 
Valuation allowance5,974 13,604 — 
Tax Act - utility excess deferred income taxes amortized(3,573)(3,573)(3,573)
Other(512)(1,436)(1,356)
Income tax provision$33,286 $36,494 $18,440 
Effective income tax rate22.0 %18.3 %14.0 %

The Company and one or more of its subsidiaries files or expects to file income and/or franchise tax returns in the U.S. Federal jurisdiction and in the states of Colorado, Connecticut, Delaware, Louisiana, Maryland, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Texas, Mississippi and Virginia. The Company neither files in, nor believes it has a filing requirement in, any foreign jurisdictions other than Canada. Due to certain available tax treaty benefits, the Company incurs no tax liability in Canada.

The Company’s federal income tax returns through fiscal 2017 have either been reviewed by the IRS, or the related statute of limitations has expired and all matters have been settled. Federal income tax returns for periods subsequent to fiscal 2017 are open to examination by the IRS. For all periods subsequent to those ended September 30, 2017, the Company’s state income
tax returns are statutorily open to examination in all applicable states with the exception of Colorado, New Jersey and Texas. In Colorado, New Jersey and Texas, all periods subsequent to September 30, 2016, are statutorily open to examination.

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 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 and recorded a reserve against deferred taxes on the Consolidated Balance Sheets. During fiscal 2021, a federal tax audit was completed and, as a result, the positions that the prior tax reserves related to are considered effectively settled and the related tax reserve was 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 Consolidated Balance Sheets. The tax benefits related to fiscal tax years open to examination by the IRS may be subject to subsequent adjustments.

The reserve for uncertain tax benefits for the fiscal year ended September 30, is as follows:
(Thousands)20212020
Balance at October 1,$4,930 $4,930 
Reversal of settled tax positions during the current fiscal period(4,930)— 
Balance at period end$— $4,930 

CARES Act

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 September 30, 2021 and 2020, the Company deferred approximately $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 $1.0 million deduction limit on compensation paid to covered employees from the top five officers to also include the next five highest paid employees for tax years beginning after December 31, 2026.
Other Tax Items

As of September 30, 2020, the Company had 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. During fiscal 2021, the Company exercised its ability to carryback these federal net operating losses to offset taxable income in prior periods.

For the net operating losses carried back, the Company estimated the portion of taxes considered refundable totaling approximately $22.8 million as of September 30, 2020, which was recorded as a component of prepaid and accrued taxes on the Consolidated Balance Sheets. The remaining $24.1 million that the Company has determined not to be refundable in cash, was recaptured as ITCs that were previously utilized to offset expense.

As of September 30, 2021 and 2020, the Company has tax credit carryforwards of approximately $224.2 million and $195.2 million, respectively, which each have a life of 20 years. The Company expects to utilize this entire carryforward prior to expiration, which would begin in fiscal 2035.

As of September 30, 2021 and 2020, the Company has state income tax net operating losses of approximately $554.6 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 began to expire in fiscal 2021, with the majority expiring after 2035. The Company expects to utilize this entire carryforward, other than as described below.

The impairment of the equity method investment in PennEast created potential net capital loss attributes totaling approximately $61.8 million, which can only be utilized to offset capital gains income and can be carried back three years and forward five years prior to expiration.

As of September 30, 2021, the Company has a valuation allowance totaling $23.6 million comprised of approximately $17.3 million, related to the recognition of state net operating loss carryforwards, which primarily relate to New Jersey and approximately $6.4 million related to potential capital loss carryforwards resulting from the impairment of the equity method investment in PennEast, which the Company believes may not be fully utilized prior to expiration. As of September 30, 2020, the Company had a valuation allowance totaling $17.6 million related to the state net operating loss carryforwards, as previously discussed.

The Consolidated Appropriations Act extended the 30 percent ITC for solar property that is under construction on or before December 31, 2019. Projects placed in service after December 31, 2019, may also qualify for a 30 percent federal ITC if five percent or more of the total costs of a solar property are incurred before the end of the applicable year and there are continuous efforts to advance towards completion of the project, based on the IRS guidance around ITC safe harbor determination. The credit declined to 26 percent for property under construction before the end of 2020. The Consolidated Appropriations Act, 2021 extended the 26 percent tax credit for property under construction during 2021 and 2022. The credit will drop to 22 percent for property under construction before the end of 2023. After 2023 the ITC will be reduced to 10 percent.