Connecticut Corporate Income Tax
Connecticut has brought in several reforms, like combined filing for unitary groups in its corporate tax environment.3 min read
Connecticut corporate income tax is levied at a flat rate of 7.5 percent. Connecticut has brought in several reforms, like combined filing for unitary groups in its corporate tax environment.
What Is a Corporation?
A corporation is a separate legal entity from its owners. It can enter into contracts and can be taxed and sued in its own name.
A corporation is formed by charter in the state in which its headquarters are located. In order to form a Connecticut corporation, you must draft and file your Articles of Incorporation with the corporate division of Connecticut Secretary of State.
Shareholders are the owners of a corporation and elect a board of directors to take major decisions and manage the business of the company on their behalf. The existence of a corporation is not affected by change in ownership.
The Advantages of Forming a Connecticut Corporation
- Shareholders of a Connecticut corporation have limited liability for business debts of the company.
- Shareholders of a corporation are accountable only to the extent of their share capital in the company. The officers, however, can be held personally accountable for their actions, like the failure to pay employment taxes.
- Corporations can raise capital by issuing shares.
- Corporations can deduct the value of benefits provided to their employees as business expenses.
- Corporations can choose to elect for S-Corp status, provided they meet certain requirements. The S-Corp election enables a corporation to file its taxes like a partnership business.
- The federal income tax rates for a corporation range from 15 percent to 34 percent, depending upon its total taxable income. These rates are comparatively lower than those applicable to a sole proprietor.
The Disadvantages of Forming a Connecticut Corporation
- The incorporation process is costlier and more time-consuming than setting up other forms of business.
- Since corporations are governed by federal, state, and local authorities, you may have to comply with more regulations and it may involve more paperwork.
- Considering the fact that shareholders have to pay taxes on the distributed profits of the company, the overall tax incidence of corporations may be higher.
Connecticut's Corporate Income Tax Structure
In Connecticut, corporate income tax is charged at a flat rate of 7.5 percent. This is the 22nd highest rate in the United States among the states that impose corporate income tax.
In 2008, the per capita corporate tax collection of Connecticut at the state-level was $153, after excluding local taxes. To put this data in perspective, Connecticut ranked 20th highest among all the states that charge corporate income tax at the state level.
Connecticut Tax Reforms
Connecticut has enacted several tax reform measures. One important reform is the combined filing of taxes for all unitary groups of corporations. Due to resistance from major Connecticut corporations, this provision was deferred until January 1, 2016, whereas all other changes were effected from 2015.
Tax Reform Changes in Connecticut Corporate Income Tax System
Prior to tax reforms, Connecticut charged a surtax of 20 percent on the amounts of income and capital taxes. For the time period between January 1, 2018, and January 1, 2019, the rate of the surtax is reduced to 10 percent. The surtax applies to companies with an income of $100,000,000 or higher. In case of companies filing unitary returns, the surtax applies irrespective of the total gross income.
The following are some other changes brought in by the tax reform:
- In effect from January 1, 2015, the amount of tax credit you can use is limited to 50.01 percent of the tax amount due.
- In effect from January 1, 2015, the net operating losses are capped at 50 percent of Connecticut income.
- In effect from January 1, 2016, you must file combined returns for all unitary groups.
- The combined return must include the income of all the entities that have common ownership and are engaged in a unitary business.
- The unitary members with a nexus with Connecticut members are called taxable members and those without such nexus are called nontaxable members.
- The income of all taxable and nontaxable members is aggregated to compute the combined income of the group.
- The net operating losses of the combined group can be shared only with the taxable members that were part of the group during the year of loss.
- Tax credits of the combined group can be shared with members that were part of the group when the credit was earned.
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