About the New Connecticut Pass-Through Entity Tax

From Connecticut Special Notice SN 2018(4):

“On May 31, 2018, Governor Malloy signed Public Act 18-49, which fundamentally changes how Connecticut taxes income earned by partnerships and S corporations, including limited liability companies treated as partnerships and S corporations for federal income tax purposes (referred to collectively as “pass-through entities”). This change is applicable to taxable years beginning on or after January 1, 2018…”

“Prior to enactment of this legislation, pass-through entities were not subject to tax on their income. Instead, the partners, members or shareholders (referred to collectively as “partners”) were required to pay tax on their distributive shares of the passthrough entity’s income.”

“For taxable years beginning on or after January 1, 2018, a pass-through entity is now subject to tax on its own income (the “Pass-Through Entity Tax”). To account for the fact that the pass-through entity must pay tax on its own income, Public Act 18-49 provides a tax credit that partners may claim on their Connecticut income tax returns and corporation business tax returns. The credit is intended to ensure the pass-through entity’s income is not taxed twice.”

This is a major sea change in the way Connecticut taxes partnerships, S Corporations, and LLC that are taxed as partnerships or S Corporations.

The calculation of the Pass-Through Entity Tax is beyond the scope of this article, but the State has given taxpayers guidance in OCG-6.  The tax rate is generally 6.99% of either the “standard base” of the pass-through entity or “alternative base” of the partners or members.  Estimated taxes are required to be paid by the pass-through entity, and taxpayers were given guidance on this on SN 2018(4).

We have contacted all clients who were affected by this sudden tax change.  Any clients who have additional questions are encouraged to contact our office.