Connecticut Tax Legislation Highlights: 2014 SessionJuly 16, 2014
Tony Switajewski, CPA
Partner, State and Local Taxes
The recently concluded 2014 legislation session of the Connecticut General Assembly passed (with the governor’s approval) important broad-based tax measures which will impact individual and business taxpayers. Following is a brief explanation of the enacted legislation which will likely have the broadest impact in the areas of individual income taxation, sales and use taxation, property taxation and business entity taxation. Please be aware of the effective dates of the legislation as they are either retroactive to January 1, 2014, occur during 2014 or are postponed until 2015 (and thereafter). The following general explanations are not meant to provide a detailed description of the legislation. Please consult with one of our state and local tax professionals to determine how these provisions may impact you or your business.
Tax Legislation Affecting Individuals:
Non-residents’ Deferred Compensation Plans: Under the legislation, codification of a regulation has been enacted which provides that a non-resident’s income includes his or her compensation from non-qualified deferred compensation plans attributable to services performed within Connecticut, including, but not limited to, compensation required to be included in federal gross income under Internal Revenue Code §457A. In general, income received by a non-resident from “retirement plans” earned in Connecticut continues to be exempt from taxation.
Non-resident Taxed on Gain from the Sale of a Pass-Through Entity Interest: Legislation enacted now requires non-residents to recognize gains and losses from the sale or disposition of an interest in a pass-through entity (such as a partnership, limited liability company or S corporation) that owns real property in Connecticut, with a fair market value that equals or exceeds 50% of all the assets of the entity (effective for tax years beginning in 2014 and thereafter).
Apportionment of Non-residents’ Individual Business Income in Pass-Through Entities: Effective for tax years beginning in 2014 and thereafter, for non-resident individual and pass-through entity (e.g., S corporations, limited liability companies and partnerships) apportionment purposes, the gross income percentage, utilized to determine Connecticut source income, is to reflect receipts from the sales of property delivered or shipped to a purchaser within Connecticut (i.e., the numerator of the factor), regardless of the F.O.B. point or other conditions of sale, rather than from the state in which the sale was originated, consummated or negotiated. However, receipts from services are still considered to be earned in Connecticut when the services are performed by an employee, agent, agency or independent contractor chiefly situated at, connected by contractor or otherwise, with or sent out from offices or branches of the business located in Connecticut. It is anticipated that legislation will be introduced next year to source services either where the services are performed or where the benefit of the services are enjoyed.
Teachers’ Pension Income Exemption: Effective 2015 and thereafter, legislation exempts a portion of state teachers’ retirement income from income taxation. The deduction is phased in as follows: for 2015 the deduction is 10%; for 2016 the deduction is 25%; and for 2017 and thereafter the deduction is 50% of the retirement income.
CHET Contributions: Legislation now allows taxpayers the ability to contribute all or part of their personal income tax refund to an individual college savings plan established under the Connecticut Higher Education Trust (CHET) or the CHET Baby Scholars Fund (effective July 1, 2014).
Angel Investor Credit Extended: Applicable to tax years beginning on or after January 1, 2014, legislation extends the sunset date for the angel investor tax credit program until June 30, 2016. This credit is allowed against the personal income tax for individuals investing in start-up, technology based Connecticut businesses. The credit is administered by Connecticut Innovations, Incorporated (CII).
Sales Tax Exemptions Added: Applicable to sales occurring on or after April 1, 2015, nonprescription drugs and medicines are exempt from sales and use taxes. Effective July 1, 2015 clothing costing less than $50 is exempt from sales and use taxes. However, a clothing and footwear sales and use tax holiday will be held Sunday, August 17, 2014, through Saturday, August 23, 2014. During that time, sales and use tax is inapplicable to purchases of clothing and footwear that cost less than $300 per item.
Estate Taxation: With respect to estates of decedents dying on or after January 1, 2015, the definition of “Connecticut taxable estate” is modified to exclude property that is also included in the Connecticut taxable estate as a lifetime gift. The legislation also provides a credit for any Connecticut gift taxes paid with respect to such gifts.
Tax Legislation Affecting Businesses:
Manufacturing Reinvestment Account (“MRA”): In general, an MRA is a savings account created by a manufacturer to be utilized for qualified investments in property and employees. Under the MRA program, a manufacturer may make annual cash contributions to a designated savings account, not to exceed the lesser of $100,000 or the manufacturer’s domestic gross receipts.
The tax benefit of establishing an MRA includes a Connecticut income tax deduction for the amount contributed to the account so long as the monies are utilized for qualified purchases.
Under enacted tax legislation, contributions to the MRA continue to be 100% deductible for Connecticut income tax purposes (for both C corporations and pass-through entities) in the year in which the contribution is made, but “qualified distributions” from the account are no longer considered taxable income (prior to 2014, 50% of qualified distributions from the account were considered Connecticut taxable income). Qualified distributions include the purchase of machinery or equipment for use in Connecticut; purchase (construction and expansion) of manufacturing facilities; or utilization of the funds for workforce training, development or expansion in Connecticut.
The legislation also reduces the number of manufacturers that can participate in the MRA program from 100 to 50, but increases the maximum number of employees a manufacturer may have to be eligible as a small manufacturer, from 50 to 150. The program is administered by the Connecticut Department of Economic and Community Development (“DECD”).
The changes apply to tax years beginning on or after January 1, 2014.
Apprenticeship Tax Credit: Effective July 1, 2015 and applicable to tax years commencing on or after January 1, 2015, pass-through entities (such as S corporations, limited liability companies and partnerships) are now allowed to earn the apprenticeship training credit and may sell, assign or otherwise transfer the credit, in whole or in part, to other taxpayers (i.e. generally, to C corporations). As of the date of this article, although the credit may be earned by a pass-through entity, it may not be passed through to the owners of the pass-through entity to reduce their tax liabilities.
Historic Structures and Homes Credits: Applicable to tax years beginning on or after January 1, 2014, legislation consolidates the historic structures rehabilitation credit and the historic preservation credit into a new historic rehabilitation tax credit that expands the types of property that may be eligible for a credit. With respect to the historic homes rehabilitation credit, 70% of the annual $3 million credit cap must be reserved for historic homes located in “regional centers” (located in 24 municipalities), as designated in the state plan of conservation and development (effective July 1, 2015).
Neighborhood Assistance Act (“NAA”) Tax Credit: Effective July 1, 2014, the NAA tax credit is available against the Connecticut corporation business tax for 100% of the cash amount invested in a “comprehensive college access loan forgiveness program” located in an “educational reform district” that has established certain minimum eligibility criteria. Pass-through entities are not eligible for the NAA tax credit.
Sales and Use Tax Exemptions Added: Effective July 1, 2016, sales of goods and service to Connecticut credit unions are exempt from sales and use taxes (federal credit unions are currently exempt from sales and use taxation).
Sales and Use Tax Return Due Date Accelerated: Effective October 1, 2014, the due date for remitting monthly sales and use tax returns and payments is moved to the 20th day of each month, rather than the last day of each month. In addition, the Commissioner of Revenue Services is authorized to require delinquent taxpayers to remit sales and use taxes collected on a weekly basis.
Highlights of property tax legislation include (1) the establishment of a property tax pilot program to allow for the assessment of commercial property based on the net profits of a business rather than the fair market value of the property; (2) changes to the property tax exemption for machinery and equipment, including machinery and equipment used in biotechnology; (3) allowing certain municipalities to delay the implementation, or the phase-in, of a real estate revaluation that is required every five years; and (4) authorizing municipalities to enter into an agreement to fix the assessment period, for a period of years, for improvements on land used for any retail business in a designated area.
Tax Policy Study: Legislation requires that a panel of experts in tax, accounting, finance, economics, and law study the state’s overall state and local tax structure and evaluate options to modernize tax policy. The panel must report its finding by January 1, 2015.
Department of Revenue Services (DRS) Revenue Tax Collection Initiative: The Connecticut DRS has recently announced that it will institute an initiative to expand tax collection and reduce the tax gap by enhancing collection efforts, expanding federal and interstate tax data matching, increasing interagency data matching and reducing tax fraud.
Cross-Entity Reorganizations: The Model Entity Transactions Act (META) was effective January 1, 2014. This legislation allows “cross-entity” mergers, consolidations and equity interest exchanges. For example, mergers between partnerships, LLCs and corporations, which have not been permitted under Connecticut law, are now permitted utilizing a simplified process without going through a multistep process. In addition, a conversion from one form of entity to another and re-domestication to or from Connecticut will be simplified. It is important to be aware that, although the legal paperwork field with the Secretary of State to effectuate mergers, conversions, etc. has been simplified, the federal and state income tax and non-income tax consequences have not changed and need to be examined in light of the transaction or reorganization occurring.
A Look Ahead:
Market-Based Sourcing of Receipts: For purposes of the sales apportionment factor, an increasing number of states are enacting legislation that source sales of services to where the services are enjoyed (i.e., the state in which the recipient of the service receives benefit from the service), rather than where the service is performed, in conjunction with economic nexus provisions. Although Connecticut has enacted economic nexus provisions, such provisions have no impact until Connecticut also adopts market-based sourcing. Therefore, it is anticipated that Connecticut will likely study market-based state sourcing during the next legislative session, especially in light of the fact that Massachusetts (eff. 1/1/2014), New York (eff. 1/1/2015) and Rhode Island (eff. 1/1/2015) have recently adopted market-based state sourcing of receipts.
Unitary Combined Reporting: The 2014 legislation session did not enact legislation that would require related corporations that have a unitary relationship to file a combined return. However, it is now noted that Connecticut remains the only New England state that does not require corporations in a unitary relationship to file a combined return. Rhode Island recently passed legislation that would require unitary corporations to file a combined report, effective for the tax years beginning on or after January 1, 2015. New York recently passed similar legislation, effective for tax years beginning on or after January 1, 2015. As a result, by 2015 all other New England states (i.e., Maine, New Hampshire, Vermont, Massachusetts and Rhode Island) and New York will require unitary corporations to file a combined return. Although required combined reporting legislation has been introduced in Connecticut in recent years, it has never been passed (in certain situations Connecticut allows elective unitary reporting; it is not mandatory). Now surrounded by unitary states, it is likely that Connecticut will re-explore, during the next legislative session, the benefit and cost of requiring combined reporting.
Connecticut Department of Revenue Services Tax Legislation Summary:
For a brief explanation of additional tax legislative changes, please visit the Connecticut Department Revenue Services website by clicking on the following link:
If you would like further information about any of these tax legislation changes, please contact Tony Switajewski at (860) 561-6810 or email@example.com.
Disclaimer: 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 and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.