CT Changes the Pass-Through Entity Tax (PET)

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The State of Connecticut recently passed legislation to change the Pass-Through Entity Tax (PET). The PET was originally enacted effective January 1, 2018.  This tax applies to Pass-Through Entities.

Entities that are subject to this tax are:

  • Partnerships
  • Limited Liability Companies treated as Partnerships
  • Subchapter S Corporations

Entities that are NOT subject to this tax are:

  • Sole Proprietorships
  • Single Member Limited Liability Companies that are disregarded entities
  • Publicly Traded Partnerships
  • C Corporations

The tax was instituted in response to the Tax Cut and Jobs Act (TCJA) of 2017.  Among the provisions of the TCJA, the Standard Deduction was almost doubled and additionally the maximum deduction for state and local income taxes (SALT) is capped at $10,000.  As a result of this, it is expected that far fewer taxpayers will itemize their deduction and will instead take the Standard Deduction.  The State of Connecticut’s response was to enact the PET legislation to provide some relief to small business owners and shift the tax burden from the individual owners and to the entity.

For 2018 the calculation for CT sourced income that the tax was assessed on did not include guaranteed payments paid by partnerships.  Guaranteed payments are similar to a partner getting a salary, although there is no W-2 issued and no withholding.  Recent legislation has changed this to have guaranteed payments included in the calculation of the Pass Through Entity Tax.  This change is effective retroactive to January 1, 2019.

For Limited Liability Companies and Partnerships that have guaranteed payments, they will need to revisit and revise their 2019 estimated Connecticut PET payments.  2019 Estimated PET payments were / are due as follows:

  • April 15, 2019
  • June 17, 2019
  • September 16, 2019
  • January 15, 2020

A PET estimated tax payment should be made as soon as possible to catch up for the guaranteed payments made for the first half of the year. When the 2018 law was implemented retroactively, just like this 2019 change, the State has agreed to abate penalties for late estimated tax payments.  The taxpayer however must actively request the waiver. Hopefully the State will take the same commonsense approach with any late 2019 PET estimated tax payments.

Just a reminder, the State has mandated that all PET estimated tax payments be made electronically. Failure to do so will result in penalty.

If you have any questions, please give our office a call. We will be happy to review the changes with you.

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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