2023 Connecticut Business Tax Changes

The 2023 Connecticut General Assembly session adopted a series of tax changes impacting the state’s business community.

The following information was sourced from the Department of Revenue Services, which is expected to issue more detailed guidance on these changes as they become available.

Corporation Business Tax

• Extension of corporate surtax: The 10% corporation business surtax was extended for three additional years to the 2023, 2024, and 2025 income years. The legislation is effective upon passage and is applicable to income years beginning on or after Jan. 1, 2023.
• Deduction for corporations operating a business consisting of trafficking controlled substances: Legislation allows those corporations that are licensed under either chapter 420f or 420h of the Connecticut General Statutes to deduct “ordinary and necessary” business expenses allowed under IRC § 162 in determining their Connecticut corporation business tax liability. The legislation is effective upon passage and is applicable to income years beginning on or after Jan. 1, 2023.
• Exemption from corporate surtax for corporations that offer an employee stock-sharing arrangement to participating employees: Legislation provides an exemption from the corporate surtax for eligible corporations offering an employee stock-sharing arrangement that distributes common stock to participating employees. Effective Jan. 1, 2025.

Corporation Business Tax Credits

• Tax credit for human capital investment: Legislation expands the scope of the tax credit to include donations or capital contributions to certain exempt organizations for the planning, site preparation, construction, renovation or acquisition of facilities in this state for establishing a childcare center in this state to be used by children residing in the community and increases the allowable tax credit. Effective Jan. 1, 2024.
• Film production tax credits that can be applied against taxes owed under Chapter 219 (Sales and Use Taxes): Legislation expands the limitation on the amount of credit an eligible taxpayer is allowed to claim against taxes from 78% to 92% for the income years commencing on or after Jan. 1, 2024, but prior to Jan. 1, 2026. Effective Jan. 1, 2024.
• Fixed capital credit: Legislation allows certain corporations to earn fixed capital investment tax credits for investments made by certain limited liability companies they own. Effective July 1, 2025.
• Historic homes rehabilitation tax credit: Legislation amends the taxes against which the credit can be applied—nonprofit corporations are allowed to claim the credits against the unrelated business income tax and all other taxpayers are allowed to claim such credits against the income tax—and amends how unused credits are to be applied. Effective Jan. 1, 2024, and applicable to taxable years commencing on or after that date.
• Housing program contribution tax credit: Legislation amends this credit by making investments in “workforce housing development projects” eligible for the tax credit. Effective June 1, 2024.
• New tax credit for pre- and post-Broadway productions and live theatrical tours: Legislation establishes a new tax credit for production companies of eligible pre- and post-Broadway productions and live theatrical tours performed at qualified facilities in Connecticut. The legislation specifies the taxes against which the credit can be applied and caps the total amount of these tax credits allowed to $2.5 million per fiscal year. Effective Jan. 1, 2024, and applicable to income and taxable years commencing on or after that date.
• New tax credit for businesses that make cash contributions to nonprofit organizations for scholarships to income-qualified students attending private elementary or secondary schools: Legislation authorizes a new tax credit for cash contributions made to a youth development organization to fund programs such as after-school tutoring, mentoring programs and workforce preparedness training. The credit is only available for income or taxable years commencing on or after Jan. 1, 2024, and prior to Jan. 1, 2026. Effective Jan. 1, 2024.
• New tax credit for contributions made by taxpayers into ABLE accounts: Legislation authorizes a new tax credit for contributions made by taxpayers into the ABLE accounts of employees who are employed by such taxpayers. The legislation specifies the taxes against which the credit can be applied and is effective Jan. 1, 2024, and applicable to income years or taxable years commencing on or after that date.
• New credit associated with participation in workforce housing opportunity development program: Legislation establishes a workforce housing opportunity development program to be administered by the Department of Housing under which individuals or entities who make cash contributions to an eligible developer for an eligible workforce housing opportunity development project located in a federally designated opportunity zone may be allowed a credit against certain taxes. The legislation caps the total amount of credits allowed per fiscal year at $5 million. Effective June 1, 2024.

Highway Use Tax

• Highway use tax returns now due on a quarterly basis: Legislation requires carriers subject to the highway use tax to file returns and submit payments quarterly, rather than monthly, beginning with the calendar quarter commencing on Oct. 1, 2023.

Income Tax

• Reduction in certain income tax rates: Legislation lowers the two lowest marginal rates. Specifically, the 3% rate on the first $10,000 earned by unmarried individuals and the first $20,000 by couples will decrease to 2%. The 5% rate on the next $40,000 earned by unmarried individuals and the next $80,000 earned by couples will decrease to 4.5%. These benefits will be capped at unmarried individual filers who earn $150,000 and couples who earn $300,000. Effective from passage and applicable to taxable years beginning on or after Jan. 1, 2024.
• Earned income tax credit: Legislation increases the earned income tax credit from the current rate of 30.5% of the federal credit to 40% of the federal credit. Effective from passage.
• Revisions to subtraction modification for pension and annuity income and IRA distributions: Legislation provides for a phase-out for allowable pension and annuity and IRA distribution deductions against the personal income tax. Effective from passage.
• Subtraction modification for taxpayer operating a business consisting of trafficking controlled substances: Legislation allows those taxpayers that are licensed under either chapter 420f or 420h of the Connecticut General Statutes to deduct “ordinary and necessary” business expenses allowed under IRC § 162 in determining their Connecticut income tax liability. Effective upon passage and applicable to taxable years beginning on or after Jan. 1, 2023.
• Subtraction modification for contributions made by taxpayers into ABLE accounts: Legislation creates a subtraction modification for contributions to an ABLE account. The subtraction modification shall not exceed $5,000 per taxable year for single filers and not more than $10,000 per taxable year for joint filers. Effective Jan. 1, 2024, and applicable to income years and taxable years commencing on or after that date.
• Sunset of the angel investor tax credit: Legislation provides that no additional tax credits shall be reserved for investments made in a qualified Connecticut business on or after July 1, 2028, or for any investments made in a qualified cannabis business on or after July 1, 2023. Effective July 1, 2023.

Motor Vehicle Fuels Tax

• Motor vehicles tax rate on diesel fuel set at 49.2 cents for fiscal year beginning July 1, 2023: Legislation sets the motor vehicle fuels tax rate on diesel at 49.2 cents per gallon for the fiscal year that runs from July 1, 2023 through June 30, 2024.  This legislation also specifies that any motor vehicle fuels tax paid on diesel during said fiscal year that is eligible for a refund is to be refunded at the 49.2 cents rate. Effective upon passage. 

Pass-Through Entity Tax

Connecticut’s pass-through entity tax will be optional beginning Jan. 1, 2024. Starting with taxable years commencing on and after Jan. 1, 2024, any entity that elects to pay such tax must give the Commissioner of Revenue Services written notice for each tax year it makes the election and must do so no later than the due date (or extended due date) for filing the return. The legislation also makes the following changes to the tax:

• Eliminates the standard base method and instead requires all entities electing to pay the tax to use the alternative base method.
• Requires that the pass-through entity to file an income tax return and pay the tax on behalf of any nonresident member for whom the business is the only source of Connecticut income.
• Eliminates the credit against the corporation business tax for pass-through entity tax paid by an entity on behalf of a corporation that is member of said entity and that is subject to the corporation tax.
• Eliminates the option for a pass-through entity to file a combined return with one or more commonly-owned pass-through entities.
• The legislation is effective Jan. 1, 2024, and applicable to taxable years starting on and after that date.

Petroleum Products Gross Earnings Tax

• Clarification of exemption for home heating fuel: Legislation clarifies the exemption for home heating oil by updating the product that is exempt from “Specification for Heating Oil D396-69” to “Specification for Heating Oil D396, as amended from time to time.” Effective July 1, 2023, and applicable to first sales occurring on or after that date.
• Aviation fuel exempt: Legislation exempts aviation fuel from the petroleum products gross earnings tax. Effective July 1, 2023, and applicable to first sales occurring on or after that date.

Aviation Fuel Tax

• New tax on aviation fuel: Legislation estables a new tax that applies to each company that distributes aviation fuel in Connecticut. The tax is imposed on the first sale of aviation fuel at the rate of 15 cents per gallon.  The tax, which must be remitted on a quarterly basis, is in effect only for the quarterly periods commencing on or after July 1, 2025, and prior to July 1, 2029. Effective July 1, 2023.

Sales and Use Taxes

• Modification to the exemption for nonprescription drugs and medicines: Legislation adds opioid antagonists to the list of nonprescription drugs that are exempt from the sales and use tax.  Effective July 1, 2023, and applicable to sales occurring on or after that date.

Administrative Provisions

Tax incidence: Legislation makes several modifications to Connecticut General Statutes § 12-7c. Specifically, the legislation expands the scope of all future incidence reports so as to require the DRS commissioner to report on the overall incidence of the pass-through entity tax and any other tax that generated at least $100 million in the most recent fiscal year prior to the submission of each report. The legislation also requires the commissioner to report on the following:

• For income tax purposes, the commissioner must report on the distribution of the property tax credit, the earned income tax credit, the pass-through entity tax credit, and any other modification against the personal income tax that resulted in a revenue loss to the state of at least $25 million in the most recent fiscal year prior to the submission of each report.
• For property tax purposes, the commissioner must report on the distribution of residential and commercial property and for residential property, the distribution of homeowners and renters.
• For all other taxes implicated by this statute, the commissioner must report on the distribution of any modification against such tax that resulted in a revenue loss to the state of at least $25 million in the most recent fiscal year prior to the submission of each report. Effective July 1, 2023.

State’s tax gap: Legislation requires the DRS commissioner to do each of the following on an annual basis:

• Estimate the state tax gap and develop an overall strategy to promote compliance and discourage tax avoidance;
• Evaluate the specific staffing needs of the department to implement such overall strategy and reduce the state tax gap and determine the progress made, if any, towards filling such staffing needs; and
• Conduct a cost benefit analysis of each major tax compliance initiative undertaken by the department in the preceding fiscal year, including tax amnesty programs, and an analysis of audit rates, by income level, undertaken by the department in the preceding fiscal year.