🔒CT budget, tax changes impact small employers

Gov. Ned Lamont has signed a two-year budget that increases taxes by about $340 million for the next fiscal year alone.

While Connecticut’s projected deficits for fiscal years 2020 and 2021 were nearly $4 billion when Lamont took office, the state’s projected revenues have increased. Along with the pending tax increases, that has reduced projected deficits over the coming fiscal years.

A number of the tax changes included in the budget, along with another Department of Revenue Services bill (House Bill 7373), will impact small and midsize employers.

Here are some highlights:

Pass-through entity tax changes

The pass-through entity (PE) tax credit, which can be used to offset personal income and corporation business taxes, is being reduced from 93.01 percent to 87.5 percent of the PE tax paid.

These changes are generally applicable to tax years beginning on or after Jan. 1, 2019.

This reduction negates — at least in part — the federal tax benefit that the PE tax was originally designed to create. In effect, this change means that owners of a pass-through entity doing business in Connecticut will be paying tax on the same income more than once to the state of Connecticut.

Also, be forewarned — Connecticut has a poor track record of limiting tax credits (i.e., corporation business tax credits, which historically could offset 100 percent of the tax due in some cases are now limited to as little as 50 percent).

Another change is the inclusion of guaranteed payments to owners in the PE tax base. By including guaranteed payments, the pass-through entity tax will increase, but partners will hopefully be able to realize a greater federal benefit, provided the PE tax deduction can be used to reduce federal income.

As noted, taxpayers must increase their PE estimated tax payments to compensate for this increase in pass-through entity tax due.

To ease the administrative burden on taxpayers, entities with less than $1,000 in annual PE tax liabilities are no longer required to make quarterly estimated payments.

Lastly, relief is provided to taxpayers who underpaid their 2018 tax due to the enactment of the PE tax, provided the tax is paid within one year of the due date.

In addition, penalties and interest do not apply to additional tax due as a result of the decreased pass-through entity tax credit reduction described above.

Sales and use tax changes

Effective Oct. 1, 2019, the definition of “tangible personal property” (TPP) will include electronically accessed canned software, except when purchased by a business for its own use.

TPP has also been modified to include digital goods (electronic audio, visual, or audio-visual works, reading materials, or ringtones). In effect, these changes increase the tax on electronic downloads from 1 percent to 6.35 percent.

Taxpayers who license, sell or purchase “digital goods” and/or electronically accessed canned software need to ensure they are familiar with these rules.

In addition, several new services, subject to certain limitations, become subject to the 6.35 percent sales tax effective Jan. 1, 2020, including dry-cleaning and laundry, interior design, and motor-vehicle parking.

Other tax changes

Significantly, the capital base tax, a levy on a business’s net worth or capital holdings, will be phased out over a four-year period beginning Jan. 1, 2021.

This change typically impacts large C corporations, but is a beneficial change for Connecticut overall, particularly for the state’s bioscience industry.

The $250 business entity tax will also be repealed as of Jan. 1, 2020.

Cynthia Galamgam is a senior manager in the state and local tax group in Hartford at accounting and consulting firm CohnReznick.