Connecticut Passes State and Local Tax Deduction “Work Around”: May Require Action Before June 15 Payment– June 11, 2018 by Cynthia Pedersen

Just weeks after the IRS announced its intention to issue proposed regulations aimed at state legislation intended to circumvent the Tax Cuts and Jobs Act’s $10,000 cap on the state and local tax deduction, Connecticut Governor Dannel Malloy signed Senate Bill 11 (S.B. 11) into law. The law will help any pass-through entities with Connecticut-source income offset the deduction limitation. However, as Connecticut requires pass-throughs to make quarterly estimated payments or face underpayment penalties, the approaching June 15 deadline makes immediate collaboration with your tax advisors critical. 

About S.B. 11

S.B. 11 creates a pass-through-entity level income tax on entities such as partnerships, limited liability partnerships (LLPs), limited liability companies (LLCs) and S Corporations. Entities disregarded as separate from owners are not subject to this new tax, such as a single member LLC.
 
The entity-level tax is intended to be fully deductible at the federal level, as opposed to personal income taxes that would otherwise be limited to the $10,000 cap, and would provide for a corresponding credit that offsets the tax on the partners’ Connecticut income tax return. The credit offsets the tax at 93.01% and is a refundable credit for individual partners. Corporate partners may carry forward the credit indefinitely.  
 
Applicable to tax years commencing on or after January 1, 2018, pass-through entities must pay an entity-level tax of 6.99% on Connecticut taxable income. Generally, Connecticut taxable income is equal to the pass-through entity's net income for federal income tax purposes. Net income is derived from or connected to Connecticut sources. It is increased or decreased by any adjustments that currently apply under Connecticut’s personal income tax law related to the entity’s income, gain, loss or deduction to the extent derived from or connected to sources within Connecticut. Additionally, pass-through entities that are also partners in other pass-throughs should subtract their distributive share of income or add their distributive share of loss from the lower-tier entity when computing their Connecticut taxable income.
 
Alternatively, certain pass-through entities may choose to elect to use an alternative tax base in determining their Connecticut taxable income. The election may be beneficial for entities controlled by corporations or other pass-throughs. 

Payment Considerations

Affected entities are required to transmit payment in four estimated tax installments due on the 15th of April, June, September and January of the next succeeding tax year. Because the new entity-level tax is effective beginning on January 1, 2018, but was not signed into law until May 31, affected entities should consider planning strategies to ensure the full amount of the estimated payment is made by the return’s deadline, e.g., play catch up for the April 15 estimated payment.
 
Connecticut will allow individual partners that already made estimated income tax payments to re-characterize all or a portion of those payments as estimated payments made by the entity. Connecticut intends to issue guidance on how to re-characterize these individual estimated payments. 

What To Do Now

The June 15 payment is fast approaching. Any underpayment of the estimated tax shall be subject to interest in the amount of 1% per month until payment is made, although it is unclear at this time if Connecticut will grant any relief for the June 15 payment due to the late signing of the bill.
 
Pass-through entity partners with Connecticut-source income should reach out to your tax team as soon as possible for guidance on complying with this new entity level tax.
  
Please contact a member of your service team or contact Cynthia Pedersen cpedersen@cohencpa.com for further discussion.
 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.