Connecticut Pass-Through Entity Tax

On May 31, 2018, Governor Dannel Malloy signed Public Act 18-49, which is a bill that responded to the Federal Tax Reform Legislation passed in December 2017. The Federal Tax Reform limited the deduction to $10,000 of state and local income and property taxes and this is the States response to circumvent this limitation. The Public Act was to change how Connecticut taxes income earned by partnerships, S corporations and Limited Liability companies treated as partnerships and S corporations for federal income tax purposes. These entities are referred to as pass-through entities. A pass-through entity does not include sole proprietorships, or single-member limited liability companies that are disregarded entities.

For taxable years beginning on or after January 1, 2018, each pass-through entity that is required to file a tax return will now pay an entity-level tax of 6.99%. The tax will be calculated on the adjusted taxable income connected to Connecticut source income. This entity tax will be a Federal deduction on the pass-through entity and the members or partners who are subject to the personal income tax are now eligible to claim a refundable credit equal to their pro rata share of the tax paid by the entity multiplied by 93.01%.

The Public Act also requires a pass-through entity to make estimated tax payments against the Pass-Through Entity Tax liability. Estimated payments for calendar year filers are due April 15, June 15, September 15 and January 15. The new law requires that each estimated payment equal 22.5% of the pass-through entity’s tax liability. There is an ability to recharacterize your personal estimates to your pass-through entity so that you are not subjected to an underpayment penalty for the April, June and September estimate. Guidance is supposed to be provided by September 15th regarding the recharacterization. Please contact us to discuss the new Pass-Through Entity Tax calculation or whether your pass-through entity should begin to make estimated tax payments.

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