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Connecticut Department of Revenue Services Issues CARES Act Guidance

On July 6, 2020, the Connecticut DRS issued two OCG administrative releases in reaction to the federal government’s CARES Act.

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On July 6, 2020, the Connecticut DRS issued two OCG administrative releases in reaction to the federal government’s CARES Act.

On July 6, 2020, the Connecticut Department of Revenue Services (DRS) issued two Office of Commissioner Guidance (OCG) administrative releases in reaction to the federal government’s CARES Act. OCG-10 addresses Connecticut’s tax treatment of various CARES Act tax provisions such as the taxation of federal stimulus checks, loan forgiveness under the Paycheck Protection Program, coronavirus-related distributions from qualified retirement accounts, net operating loss (NOL) carrybacks and the excess business loss limitation for non-corporate taxpayers. OCG-11 addresses Connecticut’s tax treatment of depreciation of qualified improvement property (QIP).

OCG-10 Regarding the Connecticut Tax Implications of the CARES Act

OCG-10 does not provide guidance on every federal tax provision contained in the CARES Act, such as Connecticut’s treatment of the charitable contribution provisions and the exclusion for student loan repayment. Following is a brief summary of the conclusions reached by the DRS with respect to the federal tax provisions that were addressed.

  • Federal Economic Impact Payments: Similar to federal income tax law, Connecticut will likewise not subject federal stimulus checks to income taxation.
  • Coronavirus-Related Distributions from Qualified Retirement Accounts: Connecticut will subject to income tax such distributions to the extent they are included in a taxpayer’s federal taxable income (i.e., adjusted gross income). These payments may be subject to Connecticut income tax withholding, by the party paying them, at a tax rate of 6.99%.
  • Paycheck Protection Program Loan Forgiveness: Connecticut has determined that loans that are forgiven under the Paycheck Protection Program that are excluded from federal income are likewise not included in a taxpayer’s Connecticut taxable income. Although OCG-10 does not discuss whether expenses associated with the forgiven income are nondeductible for Connecticut income tax purposes, inferences leads us to believe that Connecticut will follow the federal non-deductibility treatment.
  • Individual Excess Business Loss Limitation Repealed (a.k.a. §461(l) loss): Previous to the CARES Act, individuals were limited from using more than $250,000 ($500,000 for married taxpayers) of “business losses” to offset “nonbusiness income.” Any excess was able to be carried forward. The CARES Act repealed the limitation for years beginning before January 1, 2021, thus allowing the full loss to be offset by an individual’s other income (e.g., non-business generated capital gains). Considering that the repeal is nonelective, taxpayers with an excess business loss in 2018 or 2019 should amend their Form 1040 to claim the loss that was limited. For Connecticut income tax purposes, the extent that such excess business loss limitation increases or decreases an individual’s federal adjusted gross income, in a particular year, will dictate the Connecticut income tax treatment in such year.
  • Net Operating Loss Carryback: The CARES Act permits NOLs from the 2018, 2019 and 2020 tax years to be carried back to the previous five years. Taxpayers can, however, elect to waive the loss carryback.

OCG-10 explains that for corporate business tax purposes (applied to C corporations), Connecticut decouples from the federal net operating loss carryforward and carryback provisions and has its own set of rules. Therefore, for corporate business tax purposes, the CARES Act has no bearing on the utilization of NOLs for C corporations. However, for individual income tax purposes, to the extent that an individual taxpayer incurs a federal net operating loss that is carried back, Connecticut will allow an individual taxpayer the ability to likewise carryback the loss up to five years for Connecticut income tax purposes.

Although Connecticut will likely be facing a significant current year deficit due to an unexpected drop in many types of revenue streams—not only from income taxes but also from decreased sales tax revenue—we are not aware, at this time, of any potential legislation that would modify the above determinations. That is not to say that the state legislator will not convene in the fall during a special session this year or during the general legislative session next year to scrutinize the revenue impact that the CARES Act provisions are having on running the state of Connecticut. For example, New York, foreseeing the state (and New York City) revenue impact that the CARES Act provisions would have on the state/city, was quick to be proactive to enact legislation earlier this year to decouple from the CARES Act tax provisions in their entirety.

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OCG-11 Regarding Depreciation of Qualified Improvement Property for Connecticut Tax Purposes

Prior to the CARES Act, the depreciable life of qualified improvement property for federal income tax purposes (QIP) was 39 years. The CARES Act now provides QIP with a depreciable life of 15 years under the general depreciation system (and a depreciable life of 20 years under the alternative depreciation system). The changes made by the CARES Act not only provide for a quicker depreciable life but also make QIP eligible for federal bonus depreciation. These changes are retroactively applicable to QIP placed in service after December 31, 2017. As a result, taxpayers are provided with an opportunity to accelerate depreciation for QIP placed in service on or after January 1, 2018, either by amending previously filed federal tax returns or by filing an Application for Change in Accounting Method (Form 3115).

As OCG-11 explains, for Connecticut income tax purposes, Connecticut has specifically decoupled (i.e., does not allow) bonus depreciation. Therefore, if a taxpayer now claims bonus depreciation either by amending a return or filing Form 3115 with the Internal Revenue Service, a state taxable income modification must be made. OCG-11 explains how to calculate the modification for corporate and non-corporate (e.g., pass-through entities, individuals) income tax purposes.

OCG-11 >>

Should you have any questions about how the above provisions may affect you, please contact Tony Switajewski at tswitajewski@blumshapiro.com.

 

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 statutes, 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.

The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.

 

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