Connecticut introduces 2019 tax year changes

Pass-Through Entity Changes

1. In 2018, CT first imposed a tax at the highest personal CT rate on S corporations, partnerships and LLCs. CT also provided for a credit in 2018 of 93.01% of the entity-level tax that owners could use on their individual CT returns.  For tax year 2019, the credit available to be used by owners has been reduced to 87.5%.
2. For income tax years beginning on or before June 26, 2019, interest and penalties are waived on any extra taxes owed by pass-through owners due to the reduction in the pass-through credit rate.
3. The tax base for calculation of the 2019 pass-through entity tax has been modified to:
   • Include guaranteed payments in the Standard Base and the Alternative Base.
   • Exclude expenses treated as an itemized deduction for federal income tax purposes.
4. Non-resident individuals whose only CT source income is from pass-through entities will not be required to file a 2019 CT individual tax return if the individual:
   • Receives a Schedule CT K-1 and the pass-through entity tax credit satisfies in full the individual’s CT income tax liability; or
   • Receives a CT K-1 with the box “PE filed Schedule CT-NR, Elective Composite Income Tax Remittance Calculation.”
5. Pass-through entities with required annual payments of less than $1,000 are not required to make estimated payments.
6. The $250 business entity tax has been repealed, effective January 1, 2020. It has been replaced with a higher annual report fee payable to the CT Department of State.

Mazars Insight

Individual owners of CT pass-through entities will most likely see higher tax liabilities as a result.  Non-residents who are relieved of a filing requirement as discussed above may still file a CT non-resident return if beneficial.

Corporate Changes

1. The 10% business surcharge has been extended to tax years beginning before January 1, 2021. The surtax does not apply to corporations with gross income of under $100 million or subject to the minimum tax.
2. For tax years 2019 and later, the cap on R&D and Urban Reinvestment Act credits has been reduced from 70% to 50.01% of a corporation’s CT tax liability.

Individual Changes

1. CT has enacted a change affecting telecommuting employees that impacts how CT non-residents may be taxed in CT for individual income tax purposes. CT has joined several other states including New York and Pennsylvania in adopting a “convenience of the employer test.”  The convenience of the employer test says that compensation earned by a non-resident employee is attributable to the office in the state to which the employee is assigned unless the employer requires the employee to work from another location outside the state for business purposes.  As a result, CT non-resident wages are taxable in CT if they are working remotely for a CT employer for other than business reasons.   This further means employers will need to withhold CT individual income tax in the event the compensation earned by an employee working remotely is assigned to CT.

Note, however, that the CT provision only applies when the individual’s state of domicile also has a convenience of employer test.  The Special Notice issued by the State of Connecticut Department of Revenue Services specifically states that their test is intended to be like the one currently applied by New York to CT residents.  Connecticut resident employees working from a remote location who are subject to tax on income earned in a jurisdiction that applies the convenience of the employer test, will now be eligible to claim a credit on their Connecticut income tax return for taxes paid to such jurisdiction.

Mazars Insight

With remote workforces becoming more popular, it is increasingly likely that an individual’s wages may be taxable in certain states even if they never set foot in that state.

2. For taxable years beginning on, or after, January 1, 2019, the thresholds for determining the amount of Social Security benefits excluded from CT income tax are revised. Now taxpayers that file single or married filing separate with less than $75,000 of federal adjusted gross income can fully subtract their Social Security income. The threshold for married taxpayers filing jointly is $100,000.

Please contact your Mazars USA LLP professional for more information.

Published on: March 13, 2020

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.