On May 31, Connecticut Gov. Dannel Malloy signed Senate Bill (S.B.) 11, enacting several changes to Connecticut income taxes in response to federal tax reform. The most significant change is the imposition of a new entity-level tax on pass-through entities (PTEs), effective for taxable years beginning on or after Jan. 1, 2018.
Pass-Through Entity Tax
The tax on PTEs is imposed at the entity level and is imposed on S corporations, partnerships, and limited liability companies treated as S corporations or partnerships.1 PTEs may elect to file the tax on a combined basis with one or more commonly owned PTEs subject to the tax. The PTE tax provides a credit against both individual and corporate income taxes.
The PTE tax base includes separately and nonseparately computed items under the IRC, adjusted by Connecticut modifications, sourced to Connecticut using existing individual income sourcing rules. If the PTE is in a loss, the loss may be carried forward indefinitely. The tax rate is 6.99 percent (the highest individual tax rate). There is an annual election that PTEs may make to compute tax on the alternative base, which appears to remove the portion of income allocated to corporate or tax-exempt members.
The due date for the PTE tax return is March 15 for calendar year filers, or the 15th day of the third month following the close of the taxable year for fiscal year filers. The PTE tax requires quarterly estimated payments on April 15, June 15, Sept. 15, and Jan. 15 (for calendar year taxpayers). Because the law was passed on May 31, 2018, special rules apply to 2018 to make catch-up payments or to annualize the estimated payments for the year. Also, if individual partners made payments during the year, the PTE (with partner consent) can have these 2018 payments recharacterized as PTE tax payments. The Connecticut Department of Revenue Services will provide information by Sept. 30 about the mechanism to recharacterize the payments.
The new PTE tax allows both individual and corporate members to take a credit against the tax imposed on their individual or corporate returns. For individuals, the credit is refundable and is equal to the taxpayer’s pro rata share of PTE tax paid, multiplied by 93.01 percent. For corporate members of a PTE, credits are not refundable but may be carried forward. A nonresident individual member will not be required to file a Connecticut individual income tax return if his or her only Connecticut sourced income is from a business entity it holds an interest in and such business entity files and pays the PTE tax due.
Other Connecticut Income Tax Changes
Connecticut is a rolling conformity state. As such, without legislation, it would adopt the changes to the IRC under the Tax Cuts and Jobs Act (TCJA). S.B. 11 made the following changes in response to the tax reform:
Pass-Through Entity Tax
The tax on PTEs is imposed at the entity level and is imposed on S corporations, partnerships, and limited liability companies treated as S corporations or partnerships.1 PTEs may elect to file the tax on a combined basis with one or more commonly owned PTEs subject to the tax. The PTE tax provides a credit against both individual and corporate income taxes.
The PTE tax base includes separately and nonseparately computed items under the IRC, adjusted by Connecticut modifications, sourced to Connecticut using existing individual income sourcing rules. If the PTE is in a loss, the loss may be carried forward indefinitely. The tax rate is 6.99 percent (the highest individual tax rate). There is an annual election that PTEs may make to compute tax on the alternative base, which appears to remove the portion of income allocated to corporate or tax-exempt members.
The due date for the PTE tax return is March 15 for calendar year filers, or the 15th day of the third month following the close of the taxable year for fiscal year filers. The PTE tax requires quarterly estimated payments on April 15, June 15, Sept. 15, and Jan. 15 (for calendar year taxpayers). Because the law was passed on May 31, 2018, special rules apply to 2018 to make catch-up payments or to annualize the estimated payments for the year. Also, if individual partners made payments during the year, the PTE (with partner consent) can have these 2018 payments recharacterized as PTE tax payments. The Connecticut Department of Revenue Services will provide information by Sept. 30 about the mechanism to recharacterize the payments.
The new PTE tax allows both individual and corporate members to take a credit against the tax imposed on their individual or corporate returns. For individuals, the credit is refundable and is equal to the taxpayer’s pro rata share of PTE tax paid, multiplied by 93.01 percent. For corporate members of a PTE, credits are not refundable but may be carried forward. A nonresident individual member will not be required to file a Connecticut individual income tax return if his or her only Connecticut sourced income is from a business entity it holds an interest in and such business entity files and pays the PTE tax due.
Other Connecticut Income Tax Changes
Connecticut is a rolling conformity state. As such, without legislation, it would adopt the changes to the IRC under the Tax Cuts and Jobs Act (TCJA). S.B. 11 made the following changes in response to the tax reform:
- Corporations
- S.B. 11 decouples from federal interest expense limitations IRC Section 163(j) for corporate income tax purposes.
- Add-back of expenses related to the dividends received deduction is required to be fixed at 5 percent. Previously, taxpayers were allowed to calculate the amount of expenses relating to dividends deducted.
- Individuals
- S.B. 11 decouples from bonus depreciation under IRC Section 168(k) for individuals. Connecticut historically decoupled from bonus depreciation for corporations, which is retained under the new law.
- Municipalities are allowed to issue residential property tax credits to taxpayers that make charitable contributions to community supporting organizations that are tax-exempt entities whose sole purpose is to support municipal expenditures for public programs, services, and education.
- The credit may not exceed the lesser of property tax owed or 85 percent of the contribution made.
The IRS has indicated it will be scrutinizing new state legislation passed to circumvent the TCJA’s $10,000 cap on state and local tax deductions. Taxpayers should proceed with caution.
1 Certain publicly traded partnerships may be exempt from the PTE tax.
