Use of Manufacturing Reinvestment Accounts to Reduce Corporation and Pass-Through Owners’ CT Income Tax Liabilities

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Back in 2011, legislation was enacted requiring the Connecticut Department of Economic and Community Development to establish a program in which manufacturers could reduce their corporate or pass-through (e.g., partnerships and S corporations) owners’ Connecticut income tax liabilities on money set aside (for up to five years) in an interest-bearing “manufacturing reinvestment account” (“MRA”).

Manufacturing Reinvestment Account

In general, an MRA is an account created by a manufacturer and held by a Connecticut bank for the benefit of the manufacturer. The manufacturer may make annual cash contributions to the account not to exceed the lesser of $100,000 or the manufacturer’s domestic gross receipts.

Contributions to the MRA are 100% deductible for Connecticut income tax purposes (for both C corporations and pass-though entities) in the year in which the contribution is made. Prior to 2014, 50% of qualified distributions from the account were considered Connecticut taxable income. Qualified distributions from the account include the purchase of machinery or equipment for use in Connecticut; purchase (construction and expansion) of manufacturing facilities; or to utilize the funds for work force training, development or expansion in Connecticut.

Recently enacted Connecticut legislation reduces the number of manufacturers that can participate in the MRA program from 100 to 50, but it increases the maximum number of employees a manufacturer may have to be eligible as a small manufacturer from 50 to 150. In addition, the legislation eliminates the 50% income inclusion for distributions from a manufacturing reinvestment account (MRA) used for eligible purchases or expenses.

In essence, beginning in 2014, when money is contributed to an MRA, a corporation or pass-through entity now receives a permanent deduction/benefit for the contribution as long as the money is utilized for qualified purchases [i.e., no income has to be recognized upon a distribution (in the past a 50% inclusion was required)].

Any manufacturing entity with less than 150 employees that is considering  investing in property or employees within Connecticut now or in the near future should not overlook this tax incentive and consider the benefits of the MRA program. The Connecticut Department of Economic and Community Development accepts applications into the program.

The changes apply to tax years beginning on or after January 1, 2014.

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.

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