On June 12, 2023, Connecticut Gov. Ned Lamont signed the budget bill (H.B. 6941), which includes three notable tax provisions: (1) an extension of the corporation business tax (CBT) surcharge for three years; (2) changes to the pass-through entity (PTE) tax; and (3) a reduction in personal income tax rates.
Corporation Business Tax Surcharge Extended
H.B. 6941 extends the CBT surcharge from income tax years beginning before January 1, 2023, to those beginning before January 1, 2026.
The surcharge is 10% of a taxpayer’s CBT owed. It continues to apply to companies that have more than $250 in CBT liability and (1) have at least $100 million in gross income for that year or (2) file unitary combined returns.
PTE Tax Changes
For tax years before 2024, Connecticut’s PTE tax is – and remains – mandatory. For tax years commencing on or after January 1, 2024, the budget bill changes the PTE tax to an elective one. The PTE tax election will be made annually by submitting written notice to the Commissioner of Revenue no later than the due date of the PTE’s return, including extensions.
H.B. 6941 requires electing PTEs to use the alternative base method to calculate their tax liabilities. Under that method, an electing PTE’s tax base is Connecticut-source income that directly or indirectly flows through to resident and nonresident members who are individuals plus income not sourced to Connecticut that directly flows through to members who are resident individuals. Income passed through to corporate members is excluded from an electing PTE’s tax base.
The bill also eliminates the PTE tax credit used by corporations to offset any CBT liability. Because distributive shares of corporate members are not included in an electing PTE’s tax base, an offsetting credit is no longer needed. However, the bill preserves the partial 87.5% pass-through tax credit for individual members.
Although the PTE tax is elective under the bill, Connecticut is reverting to its pre-2018 requirement that PTEs file a composite return for any nonresident members whose only source of Connecticut income is from the PTE. The PTE is again required to pay Connecticut composite tax on behalf of those nonresident members. The composite tax is offset by each nonresident members’ PTE tax credits.
Personal Income Tax Updates
For tax years beginning on or after January 1, 2024, the budget bill reduces the lowest two marginal income tax rates: from 3% to 2% for individuals with Connecticut taxable income not exceeding $10,000, and from 5% to 4.5% for those with taxable income exceeding $10,000 but not over $50,000.
Insights
Because the corporate tax surcharge has been extended through 2025, affected taxpayers should address the extension for ASC 740 purposes and modify estimated payments.
Beginning in tax year 2024, PTEs and their owners must decide annually whether it is beneficial to make the Connecticut PTE tax election. As with the other 35 state PTE tax elections, taxpayers and their advisors should model the election’s overall federal and state tax effect on the PTE and its members. Specifically for Connecticut, PTEs and members should account for the partial 87.5% tax credit and the required use of the alternative base calculation. Stay tuned for further updates once the Department of Revenue issues guidance, forms, and instructions regarding the elective PTE tax.
Written[CM1] by Scott Smith, Kent DeBruin and Sue Wook Kong. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com
[CM1]This footnote must be printed with any Alliance Firm re-use.