Important! If you receive income from pass-through entities, which includes partnerships & S-Corps, the way you pay your CT estimated taxes has changed.

Why?

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 15^th 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 15^th or June 15^th 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.

YES, you really need a W-9 from your vendors… NOW!

Now that your small business has gone through the painful process of gathering information for the annual end of the year 1099 process, we are here to offer some guidance to help make it easier when you hit the end of 2018.

TO REVIEW
Who must you obtain a W-9 from?  You should obtain a W-9 from any vendor you pay over $600 in the taxable year for services (including mixed services/materials) or rent/lease payments.  Based on how they complete this form, you will determine if they need to have a 1099 issued.  Most vendors will need to have a 1099 issued.  The only exceptions are:

• Payments to a C-Corp or an S-Corp (an LLC does not automatically fall under this exception) which is not being paid for legal or medical services
• Payments made via credit card, debit card or PayPal

TO BE COMPLIANT
You should obtain a W-9 before issuing any checks to your vendors.  If they do not provide you with a W-9, you are required to withhold and submit 28% backup withholding from any payments to the vendor.  You can be responsible for this backup withholding even if you do not collect it from your vendor.  You should also ask any existing vendors to provide you with a new W-9 each year to confirm their tax classification, tax ID or legal name has not changed.

FAILURE TO COMPLY
This is not a filing that can be ignored. You are required to indicate on your tax return if you were required to file 1099’s and, if so, if all required 1099’s were filed. Penalties for late and/or non-filing are steep. In addition to possibly being responsible for the 28% backup withholding, the IRS can impose the following penalties on your small business if 1099s are filed late (due Jan 31^st) or not at all:

1-30 days late: $50 per 1099

31 days late-Aug 1^st: $100 per 1099

After Aug 1^st-not at all: $260 per 1099

Intentional Disregard: $530 per 1099

Related to your 2017 filings, you may receive a notice from the Treasury Department (Notice CP-2100A) stating that a 1099 which was filed for 2017 by your business had an incorrect name or SSN/EIN.  Read the notice carefully; you may not need to respond to this notice, but you will need to follow up with the recipient to verify that you have the correct information on file.

Blank W-9 forms along with other tax forms are available on our website on the Forms and Worksheet page under Common IRS Forms.  If you have any questions, we are always happy to help!