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Connecticut Tax Developments

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Connecticut Tax Developments CONNECTICUT TAX DEVELOPMENTS in this issue Personal Income Tax P. 2 Corporation Business Tax P. 5 Sales and Use Tax P. 6 December 3, 2019 Estate and Gift Tax P. 10 Updates to June 26 Publication Property Tax P. 11 Miscellaneous Taxes P. 16 Tax Procedure P. 21 Administrative Pronouncements P. 22 Governor Lamont Signs Connecticut Biennial Budget: New Deal or Déjà Vu? On June 26, 2019, Governor Ned Lamont signed a $43.4 billion budget for the 2020 and 2021 fiscal years. The biennial budget addresses the projected $3.7 billion budget deficit for the period, but still increases spending by 1.7% in the 2020 fiscal year, and by 3.4% in the 2021 fiscal year. Although a Labor & letter dated June 25, 2019 published by the Office of Fiscal Analysis projected a roughly $700 million State and Local Employment surplus for the 2018-2019 fiscal year, and an increase to $2.28 billion in the Budget Reserve Fund Tax Practice Group (i.e., “rainy day fund”), the new budget contains hundreds of millions of dollars in tax and revenue Law Department increases and, in the words of the Connecticut Business and Industry Association, “shifts billions of dollars in teacher pension debt and interest onto future taxpayers after 2032.” ANDREANAAlan E. Lieberman BELLACH For Connecticut taxpayers, and particularly business taxpayers, it was a troublesome regular [email protected] BROCHU legislative session, but not as bad as it could have been. Governor Lamont was instrumental in BRIAN(860) CLEMOW* 251-5801 preventing an increase in the marginal income tax rates and the adoption of a capital gains tax on LEANDER DOLPHIN high income taxpayers, but businesses will need to contend with a hike in the minimum wage, new BRENDALouis B.ECKERT Schatz paid family and medical leave legislation, an extension of the purported “temporary” 10% corporation [email protected] FAY business tax surcharge, a reduction in the cap on the use of corporation business tax credits and VAUGHAN(860) 251-5838 FINN a reduction in the credit arising from the payment of the new Connecticut pass-through entity ROBIN FREDERICK tax, resulting in a tax increase for many owners of limited liability companies, S corporations and SUSANRaymond FREEDMAN J. Casella partnerships. On a positive note, the Legislature agreed to phase out the corporation business capital [email protected] GOODSTEIN base tax, extended for five years the angel investor tax program and repealed the biannual business GABE(860) JIRAN 251-5808 entity tax (but simultaneously increased the fees payable to the Office of the Secretary of the State ANNE LITTLEFIELD** by the pass-through entities that were subject to that tax). Businesses should be aware, however, ERICRobert LUBOCHINSKI L. Day III that the General Assembly formed a Payroll Commission to evaluate the possible implementation of a [email protected] MEHTA payroll tax on employers in Connecticut commencing on January 1, 2021, and charged the Department RICH(860) MILLS 251-5602 of Revenue Services (the “Department” or “DRS”) to take those actions intended to facilitate the TOM MOONEY*** possible electronic deposit of sales tax receipts on a daily basis. On August 15, the DRS sent an PETERElva MURPHYM. Saltzman email to employers seeking information for the new Payroll Commission regarding the number of their [email protected] MURRAY Connecticut employees and the total wages paid to those employees. KEVIN(860) ROY 251-5525 LESLEY SALAFIA Individual taxpayers also will experience an increase in their Connecticut tax liability. The General REBECCAwww.shipmangoodwin.com SANTIAGO Assembly extended the current limitations on the availability of the property tax credit, delayed the ROBERT SIMPSON increase in the state teachers’ retirement system payment deduction and repealed the STEM graduate GARY STARR tax credit. More significantly, although the Legislature thwarted the Governor’s attempt to extend CHRIS TRACEY the sales and use tax to an even longer list of services, it did extend the tax to digital goods and MATT VENHORST downloads, motor vehicle parking, dry cleaning and laundry services and interior design services, LINDA YODER and increased the tax rate on meals and beverages and non-business computer software downloads. HENRY ZACCARDI There also is a new ten-cent tax on single use plastic check-out bags, and a higher conveyance tax GWEN ZITTOUN rate on sales of real property of more than $2.5 million (subject to a possible increase of the property * Practice Group Leader tax credit that may be taken by the seller of the residence if the seller remains in Connecticut). In and Editor of this newsletter ** Deparment Chair addition, an attempt to repeal the gift tax was removed from the final budget legislation. The regular *** School Law Practice Group Leader session also resulted in a myriad of other excise and other tax law changes with which businesses and individuals will need to cope. This newsletter summarizes Connecticut tax legislation enacted, court decisions rendered and www.shipmangoodwin.com administrative guidance published by the Connecticut Department of Revenue Services during the first ten months of 2019. Please contact a member of our State and LocalTax Practice Group if you have questions regarding the new tax law changes or how they may affect you and your business. On July 11, our tax attorneys hosted a CLE Webinar entitled “Annual Connecticut Tax Update 2019.” Visit our CLE Knowledge Center (www.shipmangoodwin.com/cle-events) or register at https://event.on24.com/wcc/r/2029838/234B57DB630A765A2DD18E7D9B14C000 to view an on demand replay. Shipman & Goodwin LLP December 2019 PERSONAL INCOME TAX I. Legislation Pass-Through Entity Tax. In 2018, the Connecticut General Assembly enacted a new entity-level income tax at the flat rate of 6.99% on most pass-through businesses, including partnerships, S corporations and limited liability companies that are treated as partnerships or S corporations for federal income tax purposes. The new tax was intended generally not to adversely impact the state personal income tax liability of most taxpayers because each individual owner of the pass-through entity is entitled to a refundable credit against the personal income tax equal to 93.01% of the owner’s pro rata share of the tax liability of the pass-through entity. During the 2019 legislative session, the General Assembly amended the statutes governing the pass-through entity tax in two separate public acts. First, the legislature reduced the credit to 87.5% of the owner’s pro rata share of the tax paid by the pass-through entity, effective for taxable years commencing on or after January 1, 2019. Conn. Gen. Stat. § 12-699(g), as amended by Conn. Pub. Act No. 19-117, § 333 (effective June 26, 2019, and applicable to taxable and income years commencing on or after January 1, 2019). The same public act provides further that the statutory requirements governing the making of estimated tax payments are not to apply to the additional tax due as a result of the decrease in the credit for the taxable or income year commencing on or after January 1, 2019, but prior to the effective date of the legislative change. Conn. Pub. Act No. 19-117, § 334 (effective June 26, 2019). In a second public act, the General Assembly amended the pass-through entity tax provisions to (i) provide that the tax base is to include the separately and non-separately computed items as described in I.R.C. § 702(a) (in the case of a partnership) and I.R.C. § 1366 (in the case of a S corporation) of the entity (A) excluding any item treated as an itemized deduction for federal income tax purposes, and (B) including guaranteed payments as described in I.R.C. § 707(c); (ii) clarify that a taxpayer-owner of a pass-through entity is entitled to a credit equal to such person’s direct and indirect share (not “pro rata” share) of the tax due and paid by the pass-through entity multiplied by 93.01%; (iii) exempt from the obligation to make quarterly estimated tax payments those pass-through entities with less than $1,000 in annual estimated tax obligations; and (iv) clarify that a nonresident individual owner of a pass-through entity is not required to file a Connecticut income tax return for any taxable year if the only source of Connecticut income of the individual (or the individual and his/her spouse if filing a joint return) is from one or more pass-through entities and the aggregate pass-through entity tax credit allowed to the individual for that taxable year would fully satisfy the Connecticut tax due for that year. Conn. Gen. Stat. §§ 12-699 and 12-699a, as amended by Conn. Pub. Act No. 19- 186, §§ 1-2 (effective July 1, 2019, and applicable to taxable years commencing on or after January 1, 2019). Finally, in response to the fact that the pass-through entity tax was enacted in May 2018, but made retroactive to January 1, 2018, the second public act directs the Commissioner of Revenue Services to waive any penalty, interest and addition to tax caused by the late payment of any pass-through entity tax or personal income tax for the 2018 taxable year that was increased or created as a result of the enactment of the pass-through entity tax, provided that the tax payment is made within one year of its due date (i.e., March 15, 2020, for calendar year filers). Conn. Pub. Act No. 19-186, § 32 (effective July 8, 2019). [Ed. note.Taxpayers are reminded that the United States Treasury has yet to publish guidance as to whether it will honor the deduction by a pass-through entity of its liability for the Connecticut pass-through entity tax when calculating its net income for federal tax reporting purposes.
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