Connecticut Enacts Tax LegislationSeptember 18, 2009
By Tony Switajewski,CPA
After many months of deliberation, the Connecticut legislature enacted a budget bill that provides broad tax legislative changes.
Economic Nexus Standard Applied to "Out-of-State" Businesses: For tax years beginning on or after January 1, 2010, any "corporation, S corporation, or partnership" that has a substantial "economic presence" within Connecticut (regardless of whether the entity has any "physical presence" within Connecticut) will subject an out-of-state corporation or the non-resident owners of S corporations and partnerships to Connecticut income taxation. Although a "limited liability company" is not specifically enumerated as a type of legal entity that is subject to the economic nexus standard, it is anticipated that the economic presence standard will apply to limited liability companies. Economic nexus has been broadly defined to mean purposefully directing business towards Connecticut viewing the economic contact taken as a whole. Although this standard is most often applied to the financial service industry or intangible holding companies (e.g., licensing of trademarks and trade names), it can be extended to other businesses that derive significant revenue from Connecticut sources. (See our August 2009 State and Local Tax E-mail Newsletter for a more detailed explanation of nexus, including economic nexus.)
Tax Settlement Initiative Program:
TSI Program: For the period October 1, 2009 through December 15, 2009, a "tax settlement initiative program" has been established. The legislation authorizes the Commissioner of Revenue Services to send written statements of eligibility to participate in the program to taxpayers who owe certain previously imposed taxes, interest or penalties. Upon written notification from the Commissioner, if a taxpayer pays the tax that is owed in full, civil penalties will be waived as well as 50% of the interest due.
Offshore Accounts Voluntary Disclosure Program:
Offshore Accounts: Under a recently concluded IRS amnesty program, U.S. taxpayers with undeclared offshore bank accounts were allowed to report those assets and income to the Internal Revenue Service under specific voluntary disclosure guidelines. Those who came forward were subject to federal income taxes, interest and specific penalties for a limited 6-year look-back period.
Connecticut has instituted a voluntary disclosure program for offshore accounts, which will conclude on January 15, 2010.
Corporation Business Taxation:
Decoupling of Cancellation of Indebtedness Income Deferral: For corporate income tax purposes, Connecticut will not recognize IRC Sec. 108 (i).
Federal DPAD: Effective for tax years beginning on or after January 1, 2009, Connecticut will not allow corporations the ability to deduct the federal domestic production activities deduction ("DPAD"), pursuant to IRC §199, when computing Connecticut taxable income. This deduction will also not be allowed for personal income tax purposes.
Three-year Corporation Business Tax Surcharge: For tax years beginning on or after January 1, 2009 and prior to January 1, 2012 (i.e., 2009, 2010 and 2011), an additional 10% corporation tax surcharge will be imposed (effectively increasing the corporate income tax rate to 8.25% from 7.5% and the capital base tax rate to .0034 from .0031). However, corporations with "gross income" less than $100 million, other than corporations filing combined or unitary returns, are not subject to the surcharge. In addition, corporations whose tax liability does not exceed the $250 minimum tax are not subject to the surcharge.
Preference Tax: The maximum preference tax for corporations filing Connecticut combined corporation business tax returns is increased from $250,000 to $500,000 (effective for tax years beginning on or after January 1, 2009).
Donation of Open Space Land Credit: For tax years beginning on or after January 1, 2009, the carry forward period for the donation of open space land credit is extended from 15 to 25 years.
Film and Digital Animation Production and Infrastructure Investment Tax Credits: For tax years beginning on or after January 1, 2010, numerous changes have been made to the film production, film production infrastructure and digital animation production tax credits.
Green Buildings Tax Credit: Applicable to tax years beginning on or after January 1, 2012, a green buildings credit is available for the construction or renovation of buildings that meet specified environmental and energy standards.
Estimated Tax Payments: Corporations must adjust their estimated tax payments to take into account the above changes.
Personal Income Taxation:
Income Tax Rate Increase: For 2009 and subsequent tax years, the highest marginal Connecticut personal income tax rate increases to 6.5% (currently 5%) for individuals with Connecticut taxable income over $500,000 (single and married filing separately filers), $800,000 (heads of household filers) and $1,000,000 (joint filers). The 3% and 5% marginal tax rates remain in effect for Connecticut taxable income below these thresholds.
Estimated Income Tax and Wage Withholding Payments: Individuals must adjust their estimated tax payments and withholdings to take into account the tax rate increase.
Decoupling of Cancellation of Indebtedness Income Deferral: For personal income tax purposes, Connecticut will not recognize IRC Sec. 108 (i).
Estates, Trusts and Gift Taxation:
Estate and Trust Income Tax Rate Increase: For 2009 and subsequent tax years, the Connecticut income tax rate imposed on trusts and estates increases to 6.5% from 5% on all taxable income.
Estate and Gift Tax: Effective for deaths and gifts occurring on or after January 1, 2010, estate and gift taxes will apply to estates and gifts over $3.5 million (currently $2 million). In addition, the so-called "cliff tax" is eliminated and the marginal tax rates have been reduced by 25%. As a result, the amount of estates/gifts over $3.5 million will begin to be subject to a tax rate of 7.2% (formerly 9.6%), gradually increasing to 12% (formerly 16%) for estates/gifts greater than $10.1 million.
Sales and Use Taxation:
Potential Reduction in Tax Rate: Effective January 1, 2010, the sales and use tax general rate could potentially be reduced to 5.5% from 6%. This reduction is contingent upon the State meeting certain revenue targets.
Numerous changes have been made to revaluation dates, valuation methods, and Board of Assessment appeals.
Real Estate Conveyance Tax: Applicable to conveyances on or after January 1, 2010, the real estate conveyance tax will apply to property that is "foreclosed by sale" due to a court order.
Cigarette and Tobacco Products Taxes: Applicable to sales occurring on or after October 1, 2009, the cigarette tax increases to $3 per pack (of 20) from $2 per pack (of 20). A $1 inventory floor tax will also be imposed on each pack of cigarettes in a dealer's or distributor's inventory as of September 30, 2009. In addition, effective October 1, 2009, the tobacco products tax increases to 27.5% from 20% of the wholesale price and the tax on snuff tobacco increases to 55 cents per ounce (currently 40 cents).
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To discuss how the above Connecticut tax legislative changes or the other state tax developments discussed in this newsletter may affect you or your business, please contact one of the below listed state and local tax professionals:
Doug Joseph, Partner: (860) 561-6829
Tony Switajewski, Principal: (860) 561-6810
Look for future BlumShapiro State and Local Tax E-mail Newsletters.
Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service or State Tax Authorities, (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to market or promote any transaction or matter addressed herein without the express and written consent of Blum Shapiro & Company, P.C., (3) Blum Shapiro & Company, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein and (4) any fees otherwise payable to Blum Shapiro & Company, P.C. in connection with this written tax advice are not refundable or contingent on your realization of tax benefits from the advice contained herein.
This is only a general explanation of the state and local tax developments discussed in this newsletter and is not intended to provide any tax advice.