Connecticut Overhauls Pass-Through Entity Tax, Now Optional

The following article was provided by Whittlesey. It is reposted here with permission.

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On June 12, 2023, Connecticut made significant revisions to its pass-through entity tax laws. 

Beginning in 2024, Connecticut will make PTET elective rather than mandatory for affected business entities, a significant departure from its earlier unique stance (other states made it optional in response to the federal cap on the itemized deduction for state taxes). 

This shift, part of the state budget bill H.B. 6941, marks a considerable change in the state’s taxation approach, aligning it with other states. 

Affected business entities that can opt-in for PTET are: 

• Partnerships, 
• Limited liability companies, or 
• S corporations operating in Connecticut or earning income tied to the state. 

Significant Changes to the PTET Framework 

The PTET overhaul brings several critical changes, including: 

• Conversion of PTET to an elective system, 
• Change to Alternative Base Tax Calculation, 
• Composite Tax Remittance, and 
• Reinstatement of Composite Tax Return 

PTET is Elective 

Starting in 2024, the PTET in Connecticut will be optional, and affected business entities will be able to opt-in by submitting written notice to the Department of Revenue Services annually. 

Entities that elect to pay PTET must make this payment by the 15th day of the third month following the end of the entity’s tax year. 

From Standard Base to Alternative Base Calculations 

Post-legislation, all pass-through entities opting in for PTET must use the alternative base while maintaining the 6.99% tax rate. 

The alternative base calculation includes the sum of the modified Connecticut source income and the resident portion of unsourced income, excluding income passed through corporate members. 

Composite Tax Remittance 

Previously, non-resident members of affected business entities were typically exempt from filing a Connecticut personal income tax return if their sole Connecticut income came from a pass-through entity, and the PTET credit completely covered their tax liability. 

The new legislation reinstates the composite tax payment system for non-resident owners. 

Reinstatement of Mandatory Composite Tax Return 

The new law brings back the pre-2018 rules for a pass-through entity to file an income tax return and pay tax on behalf of any non-corporate non-resident member. 

Other items 

• The new law removes the corporate tax credit. However, individual shareholders, partners, or members of an affected business entity will still be entitled to a Connecticut personal income tax credit equal to 87.5% of the tax paid by the entity. 
• Also, business entities no longer have the option to file a combined return with commonly owned business entities. 

Future of PTET 

With the significant changes in the PTET law, pass-through entities now have the freedom to evaluate whether opting for the tax would be beneficial. 

It is highly recommended that affected entities consult with a CPA to analyze the potential impact of this election and determine the best tax strategy for their business.