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The Three Most Important Connecticut Economic Initiatives - Jobs, Jobs, Jobs

November 09, 2011

Tony Switajewski
Partner – State and Local Tax Consulting
BlumShapiro

Following a special fall session of the Connecticut General Assembly, Connecticut Governor Dannel Malloy recently signed into law tax legislation as part of a broad economic stimulus package.  Among the most significant tax legislation enacted was the creation of a new jobs tax credit and revisions to the recently enacted Manufacturing Reinvestment Account program. 

Businesses contemplating expanding their work force or increasing their fixed capital expenditures should begin to properly plan to qualify and take advantage of these important Connecticut tax incentives.

Among the changes, the tax legislation makes the business entity tax payable every other year; replaces three existing job creation tax credit programs with a single job expansion tax credit; reduces the minimum investment required for the “angel investor” credit; expands the types of productions eligible for film credits; and allows more companies to participate in the Manufacturing Reinvestment Account program with increased investments.   

Following is a brief summary of these changes:

Business Entity Tax
An annual $250 business entity tax is generally imposed on domestic and foreign S corporations, limited liability companies, limited partnerships (not general partnerships) and limited liability partnerships that are required to register with the Connecticut Secretary of State.  Under the new legislation, for tax years beginning on or after January 1, 2013, the tax will be payable every other year, rather than every year.

Jobs Expansion Tax Credit
Among employment opportunity credits, Connecticut tax law provides three tax credit programs for taxpayers that create new jobs within Connecticut:  (1) Job Creation Tax Credit; (2) Qualified Small Business Job Creation Tax Credit; and (3) Vocational Rehabilitation Job Creation Tax Credit.  Effective January 1, 2012, the legislation phases out all three of these credit programs and replaces them with one new Jobs Expansion Tax Credit program.  In effect, the jobs creation and vocational rehabilitation job creation tax credits will generally not apply to jobs created after 2011, and the qualified small business job credit will not apply to jobs created after 2012.  All four credits require that the business entity apply with the Department of Economic and Community Development (“DECD”) in order to be eligible to claim the credits.  Following is a brief explanation of each new jobs tax credit program:

New Job Expansion Tax (“JET”) Credit (effective 2012 and 2013)Effective for tax years beginning on or after January 1, 2012, the legislation phases out the below job tax credit programs and replaces them with a new job expansion tax credit program that provides a nonrefundable tax credit against the corporation business, personal income, insurance premium or utility company taxes for taxpayers that create “new jobs” and hire certain Connecticut residents in 2012 and 2013.

To qualify for the credit the business must file an application with the Commissioner of the DECD to receive a “certification letter”.  In addition, to qualify for the credit, the business must have been in business for at least 12 consecutive months prior to the date of the business’ application to the DECD.  It is suspected that the application will be available sometime in December 2011 on the DECD’s website:  http://www.ct.gov/ecd/site/default.asp

The tax credit is not only eligible to regular “C” corporations but is also eligible to passthrough entities such as S corporations and entities treated as partnerships as well as “disregarded entities”.  As such, S corporation shareholders, partners of a partnership or members of a limited liability company treated as a partnership and disregarded entity owners may claim the credit.  The credit is equal to $500 per month for each new employee that resides in Connecticut or $900 per month if, at the time of hiring, the employee is (a) receiving vocational rehabilitation services (b) receiving unemployment compensation benefits or has not had a full-time job since exhausting unemployment benefits or (c) a current armed forces member or a veteran who was honorably discharged or released from active service.  The taxpayer must claim the credit in the tax year in which it is earned and, if eligible, in the two immediately succeeding tax years. 

The amount of credit generated may be substantial for each new employee that is hired considering that the credit is accrued on a monthly basis.  Also, the credit is available to all types of business organizations and their owners, in the case of passthrough entities.

Qualification for the credit depends upon the number of employees the business employs:

  • Employers with 50 or fewer employees must create at least one “new job” in Connecticut.
  • Employers with 51 to 100 employees must create at least five “new jobs” in Connecticut.
  • Employers with more than 100 employees must create at least ten “new jobs” in Connecticut.

Among many criteria, a “new job” must require the employee to work at least 35 hours per week for at least 48 weeks per calendar year; or 20 hours per week for at least 48 weeks per calendar year if the employee is receiving vocational rehabilitation services or unemployment compensation or has not had a full-time job since exhausting his or her unemployment benefits.  New temporary or seasonal jobs do not count toward the credit.

Job Creation Tax Credit:  This credit may be applied against the corporate business tax, insurance premium tax or utility company tax.  This credit is not eligible to be applied against the personal income tax (i.e., individual owners of an S corporation or an entity treated as a partnership are not eligible for the tax credit).  In order to obtain the credit, the taxpayer is required to create at least ten “new full-time jobs” in Connecticut.  The credit is equal to 60% of the personal income tax deducted and withheld from the wages of new employees.  Under the phase-out legislation, the DECD may not issue any eligibility certificates on or after January 1, 2012, and no credit may be granted more than five years after the date the eligibility certificate is issued by the DECD.

Qualified Small Business Job Creation Tax Credit:  This credit may be applied against the corporation business tax, personal income tax (including the personal income tax of owners of an S corporation or entity treated as a partnership) and insurance premium tax with fewer than 50 employees in Connecticut that create new full-time jobs.  The credit is equal to $200 per month for each “new employee” hired who resides in Connecticut.   Under the phase-out legislation, this credit is only available for employees hired on or before December 31, 2012 (the new job expansion credit applies to employees hired during 2013).

Vocational Rehabilitation Job Creation Tax Credit:  This credit may also be applied against the corporation business tax, personal income tax (including the personal income tax of owners of an S corporation or entity treated as a partnership) and insurance premium tax for an employer who hires a “new qualifying employee” who resides in Connecticut.   A “new qualifying employee” is a person who is receiving “vocational rehabilitation services” from the Bureau of Rehabilitation Services or from the Board of Education and Services for the Blind.  The credit is equal to $200 per month for each qualifying employee hired.  Under the phase-out legislation, this credit applies only to employees hired on or before December 31, 2011.

The Department of Revenue Services and the DECD are working on procedures to implement the JET credit.  In addition, it is likely that the Department of Revenue Services and the DECD will be issuing further guidance with respect to sunsetting the three phased-out job creation tax credits as well as the interaction of the phased-out credits with the JET Credit.  Furthermore, as with some legislative initiatives, the JET Credit legislation may be modified in the upcoming 2012 regular legislative session to address aspects not thought of or unintended.

Tax Credit Limitation Lifted
As another measure to create jobs in Connecticut, the 70% tax credit limitation imposed on regular C corporations is lifted, by a specific formula, if jobs are created in Connecticut. Under current corporation business tax law, the amount of the aggregate tax credits that can be utilized to offset a corporation’s tax liability is limited to 70% of the amount of the tax liability. Effective for tax years beginning or on after January 1, 2011 (and prior to January 1, 2013), a corporation is now permitted to exceed the 70% cap, by an amount that is equal to $6,000 multiplied by the corporation’s “average monthly net employee gain” for the tax year. For example, if it is determined that an employer has an average monthly net employee gain of ten employees during the tax year, an additional $60,000 of tax credits, beyond the 70% cap, may be utilized to reduce the company’s corporation business tax. As the cap only applies to C corporations, this provision is not applicable to passthrough entities such as S corporations and entities treated as partnerships for tax purposes. This legislation was enacted during the 2011 regular session of the Connecticut General Assembly.

Angel Investor Credit
The so-called angel investor credit is available to individual taxpayers (and the owners of passthrough entities such as S corporations and entities treated as partnerships) that invest in start-up, technology-based businesses in Connecticut.  The credit is allowed against the Connecticut personal income tax equal to 25% of cash investments made by an angel investor in the “qualified securities” of a “qualified Connecticut business” provided that the investment is at least $100,000.  The total credits allowed to any angel investor cannot exceed $250,000.  An angel investor that intends to make an investment in a qualified Connecticut business must apply to the Connecticut Innovations, Inc. (“CII”) to be eligible for and reserve the credit.  The legislation reduces the minimum cash investment a taxpayer must make to qualify for the credit from $100,000 to $25,000The change is effective from passage, October 27, 2011.

Film Production Credit
The film production credit is amended to provide that a “relocated television production” is eligible for the credit provided it is created at a “qualified production facility” in Connecticut at which on or after January 1, 2012, the eligible production company makes a minimum investment of $25 million and creates at least 200 new jobs in Connecticut.  This change is effective from passage, October 27, 2011.

Manufacturing Reinvestment Accounts – Deferral and Reduction to Corporation
Business Taxes

During the 2011 special summer session of the Connecticut General Assembly, legislation was enacted, effective July 1, 2011, requiring the DEDC to establish a program whereby “small manufacturers” with 50 or fewer employees can defer and reduce their Connecticut corporation business income taxes (i.e., it does not appear that S corporations, entities treated as partnerships, and their owners are eligible for this program) on money they can annually set aside in an interest-bearing  “manufacturing reinvestment account” (for up to five years) with a Connecticut bank which will subsequently be utilized for expanding and training their workforce as well as for purchasing machinery, equipment and facilities.  To obtain the deferral and reduction of taxes, the manufacturer is able to deduct the deposits from its business taxable income.  At the time of withdrawal for the qualified expenditures, the manufacturer must pay taxes on the withdrawn amount but at a reduced income tax rate of 3.5% (i.e., the taxes are deferred until the time of withdrawal and in effect reduced to the extent of the spread between the full tax rate, at the time of the deduction, and reduced tax rate, at the time of withdrawal.  The current corporation business income, full tax rate is 7.5% plus an applicable surcharge percentage of 10% or 20%).  At the end of a five-year period, any balance remaining in the account is taxed at the applicable full tax rate.  The legislation doubles the limit, from originally 50 to 100, of the number of small manufacturing companies that the DECD may select to participate in the program.  This change is effective from passage, October 27, 2011.  In addition, it also increases the maximum annual amount a small manufacturer may deposit into the reinvestment account to the lesser of $100,000 (previously $50,000) or the manufacturer’s domestic gross receipts, effective for tax years commencing on or after January 1, 2012.  As the program is new, the Department of Revenue Services and the DECD will likely issue further guidance, procedures, application or notification requirements and reporting requirements.

Other Tax Legislation
In addition to the above, tax legislation was enacted that affects the urban and industrial site reinvestment credits, airport development zones tax incentives, taxation of captive insurance companies and various tax credits (e.g., insurance premium tax credits, infrastructure investment tax credits).

Property and Unemployment Taxation
Due to Storm Alfred, Governor Malloy, by executive order, has extended by two weeks the deadline for filing personal property tax declarations and unemployment insurance tax filings.  Both filings are now due November 15, 2011.

Public Act 11-1 - An Act Promoting Economic Growth and Job Creation in the State Of Connecticut; October Special Session.
Below is the link to the recently enacted Public Act 11-1:

http://www.cga.ct.gov/asp/cgabillstatus/CGAbillstatus.asp?selBillType=Bill&bill_num=6801&which_year=2011

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To discuss how the above Connecticut tax legislative changes discussed in this newsletter may affect you or your business please contact one of the below listed state and local tax professionals:,

Look for future BlumShapiro State and Local Tax E-mail Newsletters.

This is only a general explanation of the tax legislative changes and is not intended to provide any specific tax advice.  This article should not be relied upon to make any tax decisions.  Please consult us or the actual tax law for complete details about the above tax legislative changes and all of the criteria required to be met in order to be eligible for the above tax incentive programs.

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.

 

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