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What Law Firms Need to Know About Connecticut’s New Tax on Pass-Through Entities

The state of Connecticut has responded to the Tax Cuts and Jobs Act of 2017 (TCJA) with a new law – Senate Bill-11 – which, among other things, will alter its approach to taxing income from law and other professional services firms organized as pass-through entities. The law is applicable to tax years beginning on or after January 1, 2018. Law firms will need to make estimated tax payments toward this tax during 2018.  

An earlier post summarizes the major features of SB-11. The following highlights are those that potentially require prompt action on the part of those taxpayers affected by SB-11. 

The most noteworthy feature of SB-11 is that it imposes an entity-level tax of 6.99% on pass-through entities with Connecticut-sourced income. Owners will benefit from the pass-through entity tax (PET), which is deductible from firm income at the federal level, rather than being limited to the $10,000 SALT deduction under the TCJA as a personal income tax. (Note: It is uncertain whether or the not the IRS will attempt to shut down or limit this and other similar legislation.)     

SB-11 requires pass-through entities to make quarterly estimated payments equal to 25% of the required annual payment of the PET on the fourth, sixth and ninth months of the tax year and the 15th day of the first month following the close of the tax year. The required annual payment is the lesser of 90% of the tax projected for the current year or 100% of the tax reported on the entity return for the preceding taxable year, if the return covered a 12-month period. Taxpayers may annualize taxable income if that method yields a lower installment payment. They may also elect to calculate the PET on an alternative base. 

Entities must report to each of their partners, shareholders or members the direct pro rata share of the PET imposed on the entity for the tax year. A corresponding credit will pass through to owners to offset their individual Connecticut tax liabilities on their share of firm income. The Connecticut Department of Revenue Services has promised additional guidance for the PET and the related credit.

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Carolyn Dolci, CPA is a Tax Partner providing tax planning, compliance and advisory services with experience in corporate income tax, consolidated filings, partnerships, multi-state and local taxes and trusts.

Jeanne-Marie Waldman is a Senior Tax Manager with nearly 15 years of experience focusing on partnership and corporate taxation as well as state and local income tax compliance and consulting.