Connecticut makes PTET elective; enacts other changes

In detail

Changes to the pass-through entity tax

PTET will be an optional tax

For tax years beginning on or after January 1, 2024, “affected business entities” may elect to pay the PTET by providing written notice to the Department of Revenue Services for each year they make the election no later than the due date for filing the return (including extensions). An affected business entity is a partnership, limited liability company, or S corporation that does business in Connecticut or has income derived from or connected with sources within the state. Each entity that elects to pay the optional tax must remit payment by the 15th day of the third month following the close of the entity’s tax year. 

Tax base calculation 

Under current law, the PTET rate of 6.99% applies to either the standard base or the alternative base. The standard base equals: the pass-through entity’s Connecticut source income (i.e., the pass-through entity’s separately and nonseparately computed items under IRC Secs. 702(a) or 1366, to the extent derived from or connected with sources within Connecticut) less Connecticut source income from subsidiary pass-through entity that filed a Connecticut PTET return. Income passed through to corporate members is included in the standard base. The alternative base equals: the sum of modified Connecticut source income and the resident portion of unsourced income. Income passed through to corporate members is excluded from the alternative base.

The legislation requires all electing pass-through entities to use the alternative base, retaining the current 6.99% rate. 

Observation: Generally, the amount of tax due under the elective PTET will depend on the type of partner (e.g., individual or corporation) that owns an interest in the Pass-through. Entities with corporate partners reduce the base amount in proportion to the distributive shares allocated to partners not subject to Connecticut’s personal income tax under Chapter 229. 

Elective composite tax remittance eliminated

Under current law, nonresident members of an affected business entity generally are not required to file a Connecticut personal income tax return for tax years in which their only source of Connecticut income is from a pass-through entity and:

• They receive a Schedule CT K-1 and the PTET credit properly reported fully satisfies their Connecticut income tax liability; or
• They receive a Schedule CT K-1 and the box “PE filed Schedule CT-NR, Elective Composite Income Tax Remittance Calculation” is checked.

However, nonresidents must file a return if the tax liability would not be fully satisfied by the credit and the pass-through entity did not make an elective composite tax remittance calculation. The elective composite tax remittance is eliminated under the budget legislation. NOTE: See the following discussions regarding nonresident tax return filing responsibility being satisfied through reinstated mandatory composite tax payments.

Reinstated mandatory composite tax return

The legislation reverts to the pre-2018 requirement that a pass-through business generally must file an income tax return and pay the tax on behalf of any nonresident noncorporate member. If the pass-through entity elects into the PTET, any composite tax due will be reduced by the direct and indirect credit properly reported by the pass-through entity for PTET paid. 

The PTET credit may not reduce the composite tax payment due below zero. However, a composite tax is not required to be paid on behalf of nonresident partners if: (1) the partner's distributive share of partnership income, to the extent derived from or connected with sources within Connecticut, as reflected on the partnership's annual return for the tax year, is less than $1,000; (2) the department has determined by regulation, ruling, or instruction that the partner's income is not subject to the provisions of this subdivision; or (3) the partnership is a publicly traded partnership (as defined in Section 7704(b) of the Internal Revenue Code), that is treated as a partnership for federal income tax purposes and that has agreed to file the annual Connecticut return.

Nonresident tax return filing satisfied through composite tax payment

If the nonresident member’s only income derived from or connected with Connecticut sources is from one or more pass-through entities and each such entity is required to make a Connecticut income tax payment on such member’s behalf because the member’s share of each entity’s income derived from or connected with Connecticut sources is $1,000 or more, the member is not required to file Form CT-1040NR/PY. 

Offsetting tax credit

Currently, an affected business entity’s individual shareholder, partner, or member is allowed a Connecticut personal income tax credit equal to 87.5% of the pro rata share of tax paid by the entity. If the credit exceeds the member’s Connecticut tax, the excess generally is refundable for individual taxpayers. A similar credit is available to a corporate member that is subject to tax of an affected business entity. Under the new law, the corporate tax credit is eliminated. 

Observation: Governor Ned Lamont’s (D) budget bill had proposed an increase of the individual credit to 93.01%, which was not adopted in the final legislation. The elimination of the corporate tax credit should not have any practical effect, because under the amended PTET base (the former alternative base) income passed through to corporate members is not subject to tax.

Combined return election

Under current law, an affected business entity may elect to file a combined return with one or more commonly owned (based on an 80% ownership threshold) affected business entities subject to the new tax. The legislation eliminates this option.