Connecticut Governor Signs Budget Mandating Combined Reporting, NOL Limits, and Other Provisions
On June 30, 2015, Connecticut Governor Daniel Malloy signed the biennium budget and budget implementing legislation. This budget contains many significant tax changes to business which includes provisions that mandate combined reporting, extending the corporation business income tax surcharge, and limiting the net operating losses (NOLs) corporations can carry forward, among other various individual income tax changes.
Effective for tax years beginning on or after January 1, 2016, members of a group that have common ownership, are considered to be engaged in unitary business, and have at least one member that is subject to Connecticut corporation business tax are mandated to use combined reporting. Consolidated corporations for federal purposes will no longer have the option to elect to fine a Connecticut combined or unitary report.
The legislation provides for two methods of combined reporting; water’s edge method and worldwide/affiliated group method. If the designated taxable member, either the group’s common parent or member selected by the group, does not elect to report its income on a worldwide/affiliate basis then each member will have to report its share of the taxable net income/loss of the group on a water’s edge basis. Otherwise, if a designated taxable member does elect to have the combined return determined on a worldwide/affiliate basis, it may do so.
The worldwide/affiliate group method election is only effective it is made on a timely-filed, original return for an income year. This election is effective for 10 years and must include all domestic corporations that are commonly owned, both directly and indirectly, by any member of the group.
The designated taxable member of the combined group must file a combined unitary tax return and pay the tax on behalf of the taxable members and is also responsible for estimated tax installments on behalf of its members.
In addition to mandated combined reporting, the new budget also extends the corporation business tax surcharge of 20% up to January 1, 2016 and creates an NOL deduction and carry forward limitation. Effective for income tax years beginning on or after January 1, 2018 and before January 1, 2019, the surcharge is reduced from 20% to 10%.
The amount of NOLs that a corporation may carry forward and deduct from its tax liability for income years starting on or after January 1, 2015 is limited to the lesser of (1) 50% of net income, or 50% of the net income apportioned to Connecticut for companies with taxable income in other states; and (2) the excess of NOL over the NOL being carried forward from prior years.
Members of a combined group with unused NOLs over $6 billion from years prior to the beginning of January 1, 2013, may elect to carry forward and apply 50% of the unused NOLs against net income in the years beginning on or after January 1, 2015 and before January 1, 2016. This NOL limitation provision only applies after the combined group has fully used NOLs incurred in income years before January 1, 2015.
For more information on these tax changes and other tax changes related to the budget, click here.