On June 12, 2023, Connecticut made sweeping changes to its pass-through entity tax (PTET) legislation with the passing of House Bill No. 6941. Under the state’s current legislation, the PTE tax is mandatory, but under the new law, for tax years beginning on or after January 1, 2024, the tax will be elective.
An affected business entity will make the election on a yearly basis by submitting to the Department of Revenue Services commissioner a written notice of such election by the due date, including extensions. The entity also must remit payment by the 15th day of the third month following the close of the taxable year. Affected business entities include partnerships and S corporations and do not include publicly traded partnerships.
Under the current law, the PTET applies to either the standard base or the alternative base. Under this new legislation, the PTET will still be applied at the current rate of 6.99% but will only apply to the alternative base. The alternative base is equal to the resident portion of unsourced income plus modified Connecticut source income. Unsourced income is defined as the portion of total income that is not sourced to any state with which the pass-through has nexus and that directly flows through to members who are resident individuals (resident portion of unsourced income). Modified Connecticut source income is defined as the portion of an entity’s Connecticut source income (minus any Connecticut source income from subsidiary PTEs) that directly or indirectly flows through to members who are resident or nonresident individuals, trusts, or estates.
The individual income tax credit for members of an affected business entity remains the same under the new legislation at 87.5% but eliminates the corporation business tax credit for PTE taxes.
Quarterly estimated payments for the PTET are required if tax due is expected to exceed $1,000 and is due on the 15th day of the fourth, sixth, and ninth months of the current taxable year and the 15th day of the first month of the next succeeding taxable year.
Under current law, members of a PTE are generally not required to file a Connecticut personal income tax return. This new legislation reinstates the pre-2018 requirement that PTEs file a composite tax return on behalf of their nonresident members for whom the business is the only source of Connecticut income. The tax is reduced by the nonresident member’s share of direct and indirect PTE tax credits and cannot be less than zero. The tax is calculated on the highest marginal tax rate for the year.
Another change this bill introduces is the elimination of the option for PTEs to file a combined return with one or more commonly owned (based on 80% ownership rules).
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