When the Tax Cuts and Jobs Act was enacted at the end of last year, the aggregate deduction for state and local taxes was limited to $10,000 ($5,000 for married persons filing separately). Taxpayers residing in states with high income and/or property taxes, such as Connecticut, were most affected by the limitation.

On May 31, in an effort to provide relief to owners of Connecticut businesses operating as pass-through entities (i.e., partnerships, limited partnerships, limited liability partnerships, limited liability companies [LLCs] or S corporations), Public Act 18-49 was signed into law. The act does not apply to publicly-traded partnerships, sole proprietorships, or single-member LLCs that are disregarded entities for tax purposes. The act provides in part for a new income tax on most pass-through businesses at the entity level while also providing for a corresponding credit applied to the pass-through member's applicable personal income tax or corporate business tax. Both apply to taxable years beginning on or after January 1, 2018.

The new tax is levied at the top personal income tax rate of 6.99 percent and an entity tax return must be filed on or before the 15th day of the third month following the closing of the entity's taxable year for federal income tax purposes. Pass-through business members who are individuals subject to the personal income tax may claim a credit equal to their direct and indirect pro rata share of the tax paid by the pass-through business multiplied by 93.01 percent. The credit is refundable and may not be applied against the withholding tax. Pass-through business members who are companies subject to the corporation business tax may claim a credit equal to their direct and indirect pro rata share of the tax paid by the pass-through business multiplied by 93.01 percent. The credit must be applied after all other tax credits are applied and is not subject to the corporation business tax credit cap.

In addition, the act requires pass-through businesses to make estimated payments generally equal to 25 percent of the required annual payment, as defined by the act, which are due on the 15th day of the taxable year's fourth, sixth and ninth months, and on the 15th day of the first month following the taxable year. For calendar year filers, estimated tax payments are due on April 15, June 15, September 15 and January 15.

On June 6, the Department of Revenue Services published Special Notice 2018(4) to provide guidance concerning estimated tax payments and underpayments. Acknowledging that the Act was enacted after the April 15 due date for first quarter estimated tax payments in 2018, the Department provided that affected pass-through businesses may comply with their 2018 estimated tax requirements by (a) making a "catch up" payment with the June 15 payment that satisfies the first and second payment requirements; (b) making three estimated tax payments equal to 22.5 percent by June 15, September 15 and January 15, with the full amount due with the final return; or (c) annualizing estimated tax payments for the taxable year. The Department will also allow pass-through businesses to re-characterize estimated tax payments made by members, with such members' consent, so that they are applied against the pass-through business's estimated tax requirement. However, members are cautioned that the new estimated tax payment requirement does not alleviate them from any other estimated tax payment requirements they might have.

Owners, members and partners of pass-through businesses in Connecticut are encouraged to contact the attorneys at Day Pitney for help in navigating the mechanics of this new legislation and analyzing the potential consequences.

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