On June 30, Gov. Dan Malloy signedinto law after the bill was amended by in special session of the Connecticut General Assembly. The changes to Connecticut’s current tax regime:
- Enforce mandatory unitary combined reporting
- Limit net operating loss (NOL) carryforwards
- Extend the 20 percent corporate income tax surcharge
- Limit tax credits
- Impose a 1 percent sales tax on the creation, development, hosting, and maintenance of a website
- Increase personal income tax marginal rate on high-income taxpayers
Mandatory Unitary Combined Reporting
Effective for tax years beginning on or after Jan. 1, 2016, corporations are required to file unitary combined reports. Elective combined or unitary reporting no longer will be allowed. Combined reporting is required for a group of companies with common ownership (using a 50 percent ownership threshold) that is engaged in a unitary business with at least one member that is subject to Connecticut corporation tax.
The unitary group can elect to file on a worldwide or water’s-edge basis, and if no election is made the group will default to water’s edge. An election also is available to file on a water’s-edge basis for all members of an affiliated group even if the members are not unitary. An election to file on a worldwide or affiliated-group basis is effective for years for which the election is made and for the 10 immediately succeeding income years.
If a combined group decides to file on a water’s-edge or affiliated-group basis, members incorporated in jurisdictions determined to be tax havens by the tax commissioner also are included. Members determined by the commissioner to be incorporated in tax havens may be excluded from the affiliated group if the commissioner is satisfied that the member is incorporated in the tax haven for a legitimate business purpose. The commissioner must publish by Sept. 30, 2016, a list of jurisdictions determined to be tax havens. The list applies to tax years beginning on or after Jan. 1, 2016.
The legislation also provides a special deduction available only to public companies. The deduction is equal to any increase in deferred tax liabilities or reduction in deferred tax assets that result from a company adopting the new unitary rules. The deduction is claimed over seven years beginning in 2018.
Limits on NOL Carryforwards for Unitary Groups
For tax years beginning on or after Jan. 1, 2015, the NOL carryforward deduction of a unitary group generally is limited to 50 percent of apportioned income. Beginning in 2016, losses incurred by any member of the unitary group can be used by the entire group. A separate return limitation year (SRLY) rule will apply to losses incurred prior to 2016.
20 Percent Corporate Income Tax Surcharge Extension
The 20 percent corporate tax surcharge is extended for the 2016 and 2017 tax years to both the income tax base and the capital tax base. In 2018 the surcharge is reduced to 10 percent. The exemption from the surcharge is continued for corporations with less than $100 million of gross income.
Tax Credit Limitations
The amount of tax credits that corporations can apply to reduce their current year’s tax liability is reduced. For any income year beginning on or after Jan. 1, 2015, the amount of tax credit or credits allowable shall not exceed 50.01 percent of the amount of tax due from any prior income year. Previously, corporations were allowed to apply tax credits up to 70 percent of the amount of tax due in the immediately preceding income year.
Imposition of Sales Tax on Services to Maintain and Develop a Website
Effective Oct. 1, 2015, services rendered in connection with the creation, development, hosting, and maintenance of a website will be included in the definition of computer and data processing services and subject to a 1 percent sales tax rate. An exemption is provided for computer and data processing rendered between affiliates.
Increased Personal Income Tax Marginal Rates on High-Income Taxpayers
For tax years beginning on or after Jan. 1, 2015, the marginal income tax rate on married taxpayers with taxable income between $500,000 and $1 million will increase to 6.9 percent, with a rate of 6.99 percent for income in excess of $1 million. The marginal income tax rate on single taxpayers with taxable income between $250,000 and $500,000 will increase from 6.7 percent to 6.9 percent, with a rate of 6.99 percent for income in excess of $500,000.