Connecticut was the first state to enact the Pass-Through Entity Tax, which was always mandatory for any pass-through entity. However, recent changes are being implemented in 2024.
Big Changes to CT Pass-Through Entity Tax
Effective for tax years beginning in 2024, CT Pass-Through Entity Tax will now be optional for all pass-through entities (Partnerships, S Corps, and when applicable LLCs). There will be an annual election that is due on the date the return is filed, including extensions.
Pass-through entities that were once required to pay the pass-through entity tax now may determine whether it would be beneficial to elect to be subject to the tax on an annual basis.
The PE Tax Credit remains limited to 87.5% of the members’ pro-rata share of the tax paid by the pass-through entity on behalf of the taxpayer. CT Pass-Through Entity Tax Credit was eliminated for corporate business owners. The elimination of the corporate tax credit should not have any practical effect, because, under the amended PTET, income passed through to corporate members is not subject to tax.
Any pass-through entity that makes annual payments of $1,000 or greater must make estimated payments in four installments. These installments are to be paid on April 15, June 15, September 15, and January 15 for calendar year filers (If not Calendar year, the fifteenth of the fourth month during the fiscal year, the 15th of the 6th month, the 15th if the 9th month, and lastly the 15th of the 1st month after the end of the current fiscal year).
For cash-basis taxpayers, the payments must be made before the end of the year if the entity would like to take advantage of the federal deduction in the current year.
Entities are Now Required to File a Composite Return
Not only will the pass-through entity have to make the quarterly payments, but the new legislation requires the pass-through entity to file a composite tax return on behalf of their nonresident members for whom the business is the only source of CT Income.
Residents VS Non-Residents
For residents of the state of CT, the income subject to pass-through entity tax will be the income sourced from both CT, and any income source outside of CT. The amount of income subject to the pass-through entity tax for non-residents is only the portion of the income that was sourced within CT.
When to File
Form CT 1065/CT 1120SI is due on or before the fifteenth day of the third month following the close of the taxable year (March 15 for calendar year filers). If Form CT 1065/CT 1120SI is filed late or all the tax due is not paid with the return, there may be interest and penalties due at the time of filing.
The required annual estimated tax payment is the lesser of 90% of the PE tax shown on Part 1, SCH A, Line 2a of the return for the current taxable year or 100% of the PE tax shown on Part 1, Schedule A, Line 2a of the return for the previous taxable year, if the previous taxable year was a taxable year of 12 months and if the PE filed a return for the previous income year.
Under current law, an affected business entity may elect to file a combined return with one or more commonly owned (based on an 80% ownership threshold) affected business entities subject to the tax. The legislation eliminates this option.
Under current law, the PTET rate of 6.99% applies to either the standard base or the alternative base. The standard base equals the pass-through entity’s Connecticut source income, less Connecticut source income from a subsidiary pass-through entity that filed a Connecticut Pass-Through Entity Tax return.