Connecticut Tax Reform 2018 & the New Pass-Through Entity Tax

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Connecticut Senate Bill 11, signed into law May 31, 2018, as Public Act 18-49, includes a variety of tax provisions in response to the Tax Cuts and Jobs Act.

The most significant part of the legislation is the imposition of a new 6.99 percent pass-through entity (PTE) tax and a corresponding tax credit for 93.01 percent of the tax as an offset against personal income tax or corporate business tax. The tax generally is imposed on all entities taxed as a partnership for federal income tax purposes, including partnerships, limited liability companies and S corporations. According to Office of the Commissioner Guidance 6, recently released by the Connecticut Department of Revenue Services, there are two acceptable methods in determining the PTE tax base: standard base and alternative base methods. Facts and circumstances of the entity’s ownership structure must be analyzed to determine if the alternative base method is advantageous to the organization. Regardless of the tax base method used, guaranteed payments aren’t included in either method. Instead, all nonresident individuals who receive guaranteed payments are required to file a separate additional return to report all Connecticut-sourced portions of their guaranteed payments received. Another key aspect of the tax pertains to resident partners within the partnership and requires the entity to allocate any unsourced income attributable to partners who reside within Connecticut. The new tax is effective January 1, 2018, which may have immediate effects regarding estimated payments during 2018. Connecticut recently issued additional guidance on these estimated payment requirements in Special Notice 2018(4).

The bill also authorizes municipalities to provide a property tax credit to taxpayers who make voluntary donations to a “community supporting organization” approved by the municipality in the lesser of the amount of the property tax due or 85 percent of the donation. 

For personal income tax purposes, the bill includes a requirement to make an additional modification for bonus depreciation on assets placed in service after September 27, 2017, and then permits that adjustment to be subtracted ratably over the next four years. For tax years beginning after January 1, 2019, the bill requires nonresidents to source income to the state from days worked outside the state for such person's convenience if their state of domicile uses a similar sourcing method.

For tax years beginning January 1, 2018, a similar taxable income modification to the above depreciation modification is established for both personal income tax and corporate business tax where 80 percent of assets expensed under Internal Revenue Code Section 179 will be disallowed and then subtracted ratably over the next four years.

Other changes to corporation business tax include: 1) a new deduction for contributions made by the state or municipalities on and after December 23, 2017; 2) clarification that the disallowance for expenses related to dividends received is equal to 5 percent of all dividends received by a company during an income year; and 3) stipulation that business interest be treated the same as it is under federal law for deductibility purposes, with certain exceptions. 

For the estate and gift tax, the bill establishes the state exemption level at $5.49 million permanently beginning in 2020.

To learn more about how this new law could affect your organization or for assistance with the new provisions, contact Michael or your trusted BKD advisor.

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