Connecticut LLC business entity tax is part of the Public Act 18-49 bill signed into law on May 31, 2018, by the governor. The bill includes a new state income tax imposed at the entity level on pass-through entities (PTE). The imposed tax is in effect for tax years beginning on or after January 1, 2018.

PTEs subject to the tax include:

  • S corporations.
  • Limited liability companies (LLCs) treated as partnerships.
  • Partnerships.

The act does not involve:

  • Sole proprietorships.
  • Publicly-traded partnerships.
  • Single-member limited liability companies deemed as disregarded entities.

Overview of Pass-Through Entities Taxation

The tax rate imposed on the PTEs taxable income through the legislation is 6.99 percent. Taxable income is determined by one of two methods: Connecticut source income method or the alternative tax base method.

Connecticut Source Income Method

For federal income tax purposes, taxable income is equal to the company's new income that is derived or connected to Connecticut sources and increased or decreased by adjustment modifications currently applicable to personal income taxes.

A pass-through entity must also use the same sourcing rule that applies to those paying personal income tax. If a loss is the result of the computation, the net loss may be carried forward to upcoming taxable years until it is fully used.

Alternative Tax Base Method

A company may elect annually to use an alternative tax base instead of the Connecticut Source Income Method. A business making the alternative election must notify the Commissioner of Revenue Services with written notice no later than either the tax return's due date or extended due date.

The alternative tax base is equal to the resident portion of the company's unsourced income along with modified Connecticut source income. The resident unsourced income equates to multiplying a percentage equal to the sum of the ownership interest in the business by members who are residents of Connecticut.

Unsourced income is the company's net income used that is being decreased or increased by any modifications by the state that also apply to state personal income tax. The PTE subtracts taxable income from Connecticut sources along with modified federal net income from other states. The unsourced income times the sum of the ownership interests in the affected business owned by members who are Connecticut residents. This computation results in the resident portion of unsourced income.

Modified Connecticut source income is taxable income from Connecticut sources that are then multiplied by a percentage that is equal to the total ownership interests.

Composite Income Tax Return

Currently, pass-through entities must file a composite income tax return as well as pay the tax for nonresident owners. Nonresident individuals do not have to file a personal tax return if the following apply: The pass-through income is the single source of Connecticut income for either the individual or their spouse. The pass-through has paid the entity tax.

Nonresident individuals must file a return if the nonresident of the pass-through chooses to file a combined return. They must still file if the offsetting credit for the pass-through's tax payment doesn't satisfy the nonresident's Connecticut personal income tax liability.

PTEs are required to remit estimated tax payments quarterly and due as follows:

  • 25 percent by April 15 or the 15th day of the 4th of the month of the current tax year.
  • 25 percent by June 15 or the 15th day of the 6th month of the current tax year.
  • 25 percent by September 15 or the 15th day.
  • 25 percent by January 15 of the next tax year.

The required annual payment will be the lesser of 90 percent of the PTE tax reported for the current year or 100 percent of the reported tax for the previous year if the return covered a 12-month period for the previous year. There are enforcement and collection actions under the existing law that apply to pass-throughs that do not pay the taxes with 30 days of its due date. The actions include:

  • A warrant for control of the business.
  • A lien placed on the pass-through's property.
  • Penalties and interest may be imposed.

The legislation also authorizes an attorney general to begin civil proceedings to collect the tax. An interest penalty may be imposed on any pass-through that fails to pay the tax.

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