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Connecticut Tax on Pass-through Entities –
Effective January 1, 2018

This past May, Governor Malloy signed the Public Act 18-49 into action as a response to the federal tax reform, ultimately pushing the Connecticut income tax deduction from the owner to the pass-through entity business.

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This past May, Governor Malloy signed the Public Act 18-49 into action as a response to the federal tax reform, ultimately pushing the Connecticut income tax deduction from the owner to the pass-through entity business.

On May 31, 2018, Governor Malloy signed Public Act 18-49 (the Act), which is, in part, Connecticut’s response to federal tax reform. Included in the Act is a new Connecticut income tax imposed at the entity level on pass-through entities, such as partnerships (including limited liability companies treated as partnerships) and S corporations (the pass-through entity tax does not apply to sole proprietorships or single member limited liability companies, treated as disregarded entities, or regular corporations).

In essence, the goal of the tax is to push the Connecticut income tax deduction from the owner to the pass-through entity business, thus allowing the PE owner a federal income tax benefit from the state income tax deduction (via the pass-through of reduced federal taxable income, after the state income tax deduction). Because the pass -through entity pass-through income will be subject to Connecticut income taxation again (through the taxation of an individual owner’s adjusted gross income (AGI) or a corporate owner’s corporate business income), to mitigate double Connecticut income taxation on the same income, a tax credit is allowed to owners to reduce their Connecticut income tax liability.

During the summer, the Connecticut Department of Revenue Services issued guidance that explains how the pass-through entity tax will work. Guidance is provided to determine how to calculate a pass-through entity’s Connecticut taxable income, handle tiered pass-through entity situations, elect combined returns, obtain credit for the pass-through entity tax, and “recharacterize” an owner’s estimated tax payments.

Connecticut Pass Through Entity Tax Webinar

On November 8, 2018, Tony Switajewski and Kyle Tanguay, members of blumshapiro’s state & local tax group, presented a webinar that goes through the DRS guidance and nuances of the PE tax as well as discusses the impact that the PE tax will have on a PE, its financial statements, and its owners. The webinar may be accessed by clicking here.

 

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.

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