A recent CT legislative development is the introduction of the optional Connecticut (CT) Pass-Through Entity (PE) tax, effective for tax years beginning in 2024.
- Overview of the Optional CT Pass-Through Entity Tax
Commencing on January 1, 2024, the CT Pass-Through Entity tax becomes optional for all pass-through entities, including partnerships, S corporations, and applicable limited liability companies (LLCs). This optional status offers flexibility to entities in tailoring their tax approach to align with their unique financial circumstances.
- Annual Election Process
Entities opting to pay the CT Pass-Through Entity tax must make an annual election. This election is due on the date the tax return is filed, including any extensions. For calendar year tax filers, the return is due on or before March 15th, marking the fifteenth day of the third month following the close of the taxable year.
- Alternative Base Method
Under the new legislation, the standard base method is eliminated. Instead, all entities choosing to pay the tax must use the alternative base method. This shift in methodology could impact the calculation of tax liabilities and necessitates a thorough understanding of the alternative base method.
- Non-Resident Members and Tax Obligations
Entities opting for the CT Pass-Through Entity tax are required to file an income tax return and pay the tax on behalf of any non-resident member for whom the business serves as the sole source of Connecticut income. This provision adds a layer of responsibility for entities with non-resident members.
- Changes in Credit and Filing Options
The legislation brings about significant changes, including the elimination of the credit against the corporation business tax for pass-through entity tax paid by the entity on behalf of a corporation that is a member of the entity and subject to the corporation tax. Additionally, the option for a pass-through entity to file a combined return with commonly owned entities is no longer available.
- Estimated Tax Payments
Entities subject to the CT Pass-Through Entity tax may need to make estimated tax payments if annual payments equal or exceed $1,000. These payments are required in four installments and should be the lesser of 90% of the PE tax shown on the return for the current taxable year or 100% of the PE tax shown on the return for the previous year.
The optional CT Pass-Through Entity tax introduces new considerations and strategic decisions for pass-through entities. Staying informed and adapting to these changes will empower accountants to provide invaluable insights and support to their clients.
If you need additional information, please contact us at Accavallo & Company for further consulting, office at (203) 925-9600 or [email protected].
