The New Connecticut Business Entity Tax

The Jobs Cut and Tax Act (JCTA) of 2017 made the most sweeping changes to the Federal Income Tax Law in over 30 years. Read here to see the 7 Ways the 2017 Tax Bill Affects Connecticut Taxpayers. In additional to almost doubling the Standard Deduction, beginning in 2018 the maximum deduction for state and local income taxes (SALT) is limited to $10,000. As a consequence of this, it is expected that significantly less taxpayers will itemize their deductions and will take the Standard Deduction. The most common itemized deductions are mortgage interest, state and local income tax and charitable donations. Approximately 30% of taxpayers itemized their deductions before this legislation. It is estimated that about only 10% of taxpayers will itemize their deductions going forward.

Connecticut, along with other states, has adopted legislation to partially mitigate some of tax increase for certain taxpayers. On May 31, 2018 Governor Malloy signed Public Act 18-49 which among other provisions adopted a Pass-Through Entity Tax (PET Tax). This legislation is effective beginning January 1, 2018.

This legislation affects Pass-Through Entities. These entities are Partnerships, Limited Liability Companies treated as Partnerships and Subchapter S Corporations. The entities that are not affected are:

• Publicly Traded Partnerships
• Sole Proprietorship’s
• Single Member Limited Liability Companies that are disregarded entities

Prior to this legislation, Pass-Through Entities were not subject to tax on their income. The profits (or losses) of these entities ‘passed through’ to the partners or shareholders of these entities and they paid the income on their individual income tax return.

Estimated Tax Payments

Beginning in 2018 Pass-Through Entities will have to make estimated tax payments. The due dates are:

• April 15
• June 15
• September 15
• January 15

The law generally requires that each payment be 22.5% of the entities tax. Four payments of 22.5% would be 90% of the entities estimated tax liability. This is generally the ‘safe-harbor’ provision to avoid any underestimated tax penalty.
Estimated Tax Payments can be made online or using the CT DRS Pass-Through Entity Tax Voucher.

Given the late passage of the legislation during the year and the fact it was made retroactive, the Connecticut Department of Revenue Services is allowing all or a portion of any estimated tax payments made by the individual partners or shareholders to be applied against the Pass-Through Entities 2018 Estimated Tax Payment requirements. The owners of either a Partnership or a Subchapter S Corporation must complete Form CT-1065 / CT -1120SI RR . The Partnership or Subchapter S Corporation must complete Form CT-1065 /CT -1120SI RRS. Both of these forms must be completed and sent to the Department of Revenue Services by December 31, 2018.

Guaranteed Payments

Partners in partnerships (and Members in Limited Liability Companies (LLC’s)) may receive so-called ‘Guaranteed Payments.’ For the Connecticut Pass-Through Entity Tax, Guaranteed Payments are not included in the calculation of the Pass-Through Entity Tax.

Action Item

We strongly encourage our clients that have an ownership interest in a pass through entity to contact our office to ensure that, if required, you will make the 2018 Estimated Tax payment for your entity by January 15, 2019.

Also in order to preserve the deductibility of your state estimated income tax payments at the federal level, we encourage you to contact us so that we may assist you in converting any 2018 estimated tax payments made to the State of Connecticut on an individual basis to the new Connecticut pass through entity tax by December 31,2018.

About the author:

Tom Scanlon, CPA, CFP®

Tom Scanlon has over twenty-five years experience in public accounting with an extensive background in the areas of financial, tax and estate planning.

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