The following article was first published by Shipman & Goodwin LLP in the News & Insights section of its website. It is reposted here with permission.
On May 7, 2022, Gov. Lamont signed Public Act 22-118 into law. Among its many provisions, the act provides pass-through businesses operating in Connecticut, such as limited liability companies and S corporations and their members and shareholders, with the opportunity to directly benefit from the existing manufacturing apprenticeship tax credit.
As originally adopted, the manufacturing apprenticeship tax credit was only available as a credit against the corporation business tax.
In 2015, the legislature revised this credit to permit pass-through entities, such as S corporations and limited liability companies, to sell or assign any apprenticeship tax credit that was otherwise allowed to the pass-through entity.
Under the act, effective for years commencing in and after 2022, pass-through entities will now be entitled to take the manufacturing apprenticeship training credit as a credit against the Connecticut Pass-through Entity Tax liability of such entities.
In addition, under the new provision, when determining the amount of the PET credit that the owners of the pass-through entity are entitled to use on their personal return, such credit shall be based upon the amount of PET tax due by the pass-through entity prior to the application of the new apprenticeship tax credit.
Tax Credit in Action
To understand the full benefit of the revised apprenticeship tax credit for manufacturers, let’s assume that a pass-through entity has a PET tax liability of $50,000 for the year and is otherwise entitled to an apprenticeship tax credit of $10,000.
Based on this newly adopted provision, the PET tax liability of such pass-through entities would be reduced from $50,000 to $40,000.
Moreover, in determining the amount of each member’s share of the PET tax liability (which is necessary to calculate each member’s credit against their personal income tax liability), the pass-through entity would allocate to the members the $50,000 in PET tax due (prior to application of the apprenticeship tax credit), and such share would be the starting point for determining the amount of the credit allowed to such member for personal income tax purposes.
By encouraging apprenticeship programs, this provision of the act will likely result in more funding and training opportunities, especially for small and mid-sized manufacturers burdened with increased workforce and supply chain demands.
This will in turn lead to strengthening the workforce pipeline and enhancing productivity of Connecticut manufacturers.
In order to be eligible for the apprenticeship credit, an apprentice must participate in a qualified apprenticeship training program.
Such a program requires at least 4,000 hours but no more than 8,000 hours of training for certification by the Connecticut Department of Labor.
An employer who employs an apprentice enrolled in a qualified apprenticeship training program is entitled to a tax credit for each eligible apprentice of up to $7,500 or 50% of the actual wages paid to the apprentice, whichever is less.
The tax credit is only applied to the first half of a two-year term of an apprentice or in the first three quarters of a four year apprenticeship.
Employers are required to obtain a letter stating the tax credit amount from the labor department prior to filing your tax return with the Connecticut Department of Revenue Services claiming this credit.
R&D Tax Credits
The act also requires the commissioner of the Department of Economic and Community Development, in consultation with the DRS commissioner, to conduct a study as to whether the research and development tax credits should be extended to pass-through businesses.
The DECD commissioner will report their findings to the General Assembly on or before Jan. 1, 2023.
While this does not guarantee that pass-through businesses will be able to take advantage of the research and development tax credits in the future, the new study should assist lawmakers with determining the costs and benefits of expanding the credit to pass-through businesses.
Expanding the availability of the apprenticeship tax credit presents exciting new opportunities for owners of limited liability companies and S corporations, as they should be able to use the availability of the new tax credits to grow their business with a qualified workforce.
Manufacturers seeking new ways to expand operations using the benefits from the new tax credits should consult with experienced legal counsel to determine to what extent the new provisions may be applicable to their situation.
In addition manufacturers, should continue to monitor the development of the R&D credit in consultation with experienced legal counsel.