Danbury Firm Advises on Connecticut’s New Pass-Through Entity Tax Law
Knowledgeable attorneys help clients navigate state and federal tax changes
Recent tax law revisions at the state and federal levels have made compliance a challenge for businesses and individuals. In 2017, the federal Tax Cuts and Jobs Act placed a cap on deductions individuals could claim for state and local taxes. In response, Connecticut adopted legislation a few months later that gave a tax credit for income derived from partnerships, Subchapter S corporations and limited liability companies. But at the same time, the state adopted a new tax on these pass-through entities. At Collins Hannafin, P.C. in Danbury, we can advise individuals and businesses on how these changes affect them.
Skilled lawyers can develop a strategy for planning PET compliance
Prior to enactment of Connecticut’s new pass-through entity tax (PET), these organizations were not subject to income tax. Partners, members or shareholders were required to pay tax on their distributive shares of income. For tax years beginning on or after January 1, 2018:
- The law imposes a 6.99 percent tax on partnerships, LLCs, and S corporations
- The tax is imposed on either the entity’s entire Connecticut-sourced taxable income or an alternative tax base, which reduces taxable income by the percentage of nonresident ownership
- The tax is offset by a credit for personal income tax equal to 93.01 percent of the business owner’s share of the tax paid by the entity.
The Connecticut legislature created the PET as a way of countering the TCJA’s $10,000 cap on deductions for state and local tax. The cap is particularly punishing for residents of high-tax states who can no longer claim full SALT deductions. With the PET’s accompanying tax credit, partners in partnerships, members in LLCs and shareholders of S corporations will be able to bring their overall tax liability to roughly what it would have been under pre-TJCA tax rules. The tax does not apply to publicly traded partnerships, sole proprietorships, single-member LLCs or C corporations.
Note that if the PET applies to your business, you will have to make quarterly estimated payments. For calendar year taxpayers, the estimated payments are due on April 15, June 15, September 15, and January 15.
How the federal 20 percent pass-through deduction affects your business
As part of the TCJA, Congress included a deduction on taxable income for owners of pass-through businesses, having lowered the tax rate on C corporations to 21 percent (from rates as high as 35 percent). Section 199A provides for a potential 20-percent federal deduction on qualified business income. What makes income qualified and to what extent depends on a number of factors, including your line of business and how much you earn. Our tax lawyers can provide thorough and comprehensive advice on how to maximize this new provision, which is fertile with advantages for business owners.
Contact knowledgeable business attorneys to help with your Connecticut tax strategy
If you hold an interest in a pass-through entity, the lawyers at Collins Hannafin, P.C. can help you and your business comply with the new tax law and advise you on how to help minimize your tax liability at the state or federal level. Call us at 203-885-1938 or contact us online to schedule a consultation at our Danbury office.