Important! If you receive income from pass-through entities, which includes partnerships & S-Corps, the way you pay your CT estimated taxes has changed.
On June 4, 2018, Governor Dannel Malloy signed into law the “Act Concerning
Connecticut’s Response to Federal Tax Reform” (the “Act”) which provides a work-around to the $10,000 limitation on state and local tax (“SALT”) itemized deduction imposed by the recently passed federal Tax Cuts and Jobs Act of 2017 (the “TCJA”) for Connecticut taxpayers with income from pass-through entities.
The Act imposes a Connecticut income tax on pass-through entities at a flat tax rate of 6.99% of the entity’s taxable income. This tax will be an expense on the pass-through entity’s tax return (barring any IRS interference) and will reduce the income flowing through to taxpayers’ individual 1040 returns. The tax is offset by a tax credit on the taxpayers’ individual CT-1040 return. For example:
Assume A and B are equal members of AB LLC, and that AB LLC has net
income of $200,000. A tax is now imposed on AB LLC at a 6.99% rate, for
a tax of $13,980. AB LLC will deduct that amount on its federal income tax
return, as it would any other expense, and the net income of ABC LLC is
reduced to $186,020. A and B therefore will each report one-half of that lower amount, or $93,010, as income on their federal and Connecticut income tax returns. To avoid double taxation on the CT level, a tax credit based on the tax paid by the entity will be allowed on members’ CT-1040 forms to reduce their CT income tax liability.
Beginning with the 2018 taxable year, the Act requires each pass-through entity to make estimated tax payments, similar to those which the owners of the entity previously paid. Recognizing that the Pass-Through Entity Tax (“PET’) was not enacted until after the April 15th due date of first estimated tax payment, pass-through entities may comply with their 2018 estimated payment requirements by making a “catch-up” payment with the June payment that satisfies both the first and second estimated payment requirements. The DRS will also allow pass-through entities to re-characterize some or all of the April 15th or June 15th estimated payments made by the individual members so that payments are applied to the pass-through entity’s estimated payment requirements.
What should you do?
- If your CT estimates are based solely on income from a pass-through entity, you should verify the entity will be making these required PET payments. Once verified, you should not make any additional CT-1040ES payments for 2018.
- If your CT estimates are based on income from a pass-through entity and other sources of income, you should still verify PET payments are being made by the entity and review/recalculate the amounts of CT-1040ES payments you will be required to pay.
- If you are responsible for the filing of a pass-through entity tax return (Form 1065 or Form 1120S), then you will need to begin to make the 2018 PET payments for the entity using CT-1065/CT-1120SI ES Vouchers.
As always, we are here to help if you have additional questions and will update you as more information becomes available.