Connecticut December Special Session Passes Tax LegislationJanuary 06, 2016
Tax Partner – State and Local Taxes
In early December, a Special Session was called by Governor Dannel Malloy to address Connecticut’s projected deficit for the current fiscal year and to consider a number of tax law proposals. On December 8, 2015 the Connecticut General Assembly passed the state’s third major budget and revenue bill (Senate Bill 1601).
Subsequently, on December 29, 2015 the governor signed Public Act No. 15-1 containing a number of significant retroactive and prospective tax law changes that address tax legislation passed earlier this year (see Malloy Signs Budget and CT Tax Budget articles) as well as including new tax legislation to provide tax relief to individuals and Connecticut-based businesses. Following is a bullet point summary of the most significant tax legislation that was enacted:
Personal Income Taxation:
- 15 Work-Day Rule: Applicable to tax years beginning on or after January 1, 2016, an exclusion from personal income tax is provided for compensation paid to a nonresident employee who spends not more than 15 full or partial days in Connecticut. If an employee is in the state more than 15 days during the year, income tax must be paid on all the Connecticut-source compensation that the employee receives. Presence in Connecticut for reasons other than performing services as a nonresident employee is not relevant for purposes of the 15-day limitation. The Department had already provided a 14-day de minimis withholding tax rule applicable to nonresident employees (see Policy Statement 2015(6), superseding AN 2010(3) addressing the withholding requirement in reaction to the new legislation).
Corporate and Passthrough Entity Taxation:
Unitary Combined Reporting Changes: The Act provides a number of changes to the unitary combined reporting legislation that was enacted earlier this year and that is effective for tax years beginning on or after January 1, 2016. For those affected by the new unitary combined reporting regime, you should consult with your tax advisor to determine how Connecticut’s unitary reporting rules will affect your Connecticut corporation business tax liability. Unitary reporting only affects affiliated groups of corporations that are C corporations.
Single Sales Factor Apportionment: Effective for tax years beginning on or after January 1, 2016, the current three-factor apportionment formula for determining a C corporation’s business income tax liability is replaced by a single sales factor formula for multistate corporations (Note: some industries already utilize the single sales factor, such as the manufacturing, broadcasting and financial services industries). S corporations, partnerships (including limited liability companies taxed as partnerships) and self-employed businesses will continue to utilize a three-factor formula.
Net Operating Loss Limitation: Legislation enacted earlier in 2015 limits the amount of a C corporation’s net operating loss (NOL) carryforwards to 50% of the corporation’s taxable income (effective for tax years beginning on or after January 1, 2015). Although there was discussion in this special session to provide relief to the 50% limitation, limited relief is only provided to those corporations with at least $6 billion of unused NOLs.
Limitation on Tax Credits: In earlier tax legislation, the tax credit limitation that is imposed on C corporations was reduced from 70% to 50.01% of a corporation’s tax liability for tax years beginning on or after January 1, 2015. Under the Act, this limitation has been lifted over a four-year phase-in period (i.e., 2016 -2019) with respect to Connecticut’s research credits and urban and industrial site reinvestment credit. By the tax year 2019, the credit limitation will be restored to 70% for these two credits. Other credits will continue to be limited to 50.01% of the corporation’s tax liability. The same phase-in schedule applies to credits used by hospitals to offset the hospital net patient revenue tax (“hospital tax”) and credits used by ambulatory surgical centers to offset the gross receipts tax (“ambulatory surgical centers gross receipts tax”).
Manufacturing, Construction, Plastics-Related Trades Apprenticeship Tax Credit: For tax years beginning on or after January 1, 2016, the Act allows pass-through entities (e.g., S corporations, partnerships, limited liability companies taxed as partnerships) that earn the apprenticeship credit to sell, assign or transfer the credit to other taxpayers for use against their Utility Company Tax and the Petroleum Products Gross Earnings Tax, in addition to the Corporation Business Tax. As a result, pass-through entities that generate this credit may now find it easier to find other entities that could utilize it against one of the three tax types.
- Enterprise Zone Credit: Applicable to tax years beginning on or after January 1, 2017, employment threshold requirements for the corporation business tax credit for corporations created in an enterprise zone are eased for businesses engaged in certain bioscience, clean technology or cybersecurity technology activities.
Sales and Use Taxation:
- Weatherization Products and Light Bulbs: For sales occurring on or after January 1, 2016, the Act repeals the sales and use tax exemption for residential weatherization products and compact fluorescent light bulbs.
- Optional Property Tax Relief Program: Applicable to assessment years commencing on or after October 1, 2015, an optional municipality property tax relief program is provided for qualifying commercial and industrial properties in municipalities within an enterprise zone (currently, there are 17 Connecticut municipalities with a state-designated enterprise zone). In general, the program is intended to reduce the local property tax assessment on commercial and industrial property improvements.
Petroleum Gross Earnings Taxation:
Propane Sales: The petroleum gross earnings tax exemption for propane has been expanded to exempt propane sold on or after December 1, 2015 and used primarily (rather than exclusively) for heating purposes.
- Utilization of Apprenticeship Tax Credit: As previously discussed, taxpayers subject to the petroleum gross earnings tax may now purchase (often at a discount) the apprenticeship tax credit from pass-through entities to be utilized to offset their petroleum gross earnings tax. (Effective for periods beginning on or after January 1, 2016).
Connecticut Tax Panel:
As a result of 2014 tax legislation, a mandated 15-member group, with varying experience in taxation, was created with the responsibility of reviewing Connecticut’s state and local tax structure. The “Tax Panel” had been meeting during 2015 and hired an outside consultant to assist in reporting its findings in early 2016 to the governor and legislatures. It is our understanding that the Tax Panel will soon issue its final report and provide recommendations in the following broad tax areas: personal income taxation; general business taxation; sales and use taxation; estate and gift taxation (and probate fees); and property taxation. A future article will discuss the recommendations contained in the Tax Panel’s report. A final report is expected to be available in its entirety by the end of February.
If you would like to discuss any of the recently enacted tax legislation, please contact Tony Switajewski at (860) 561-6810 or firstname.lastname@example.org.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.