Connecticut’s 2019 Legislative Changes Affect Pass-Through Entity Tax

Connecticut recently modified its laws for pass-through entities (“PEs”), including law firms nationwide that are subject to Connecticut’s Pass-Through Entity Tax (“PE Tax”). We summarize the highlights of the 2019 changes below:

• Guaranteed payments are now required to be included in the PE Tax effective January 1, 2019. For the 2018 taxable year, guaranteed payments were not part of the PE Tax calculation.
• The PE Tax credit decreases from 93.01% to 87.5%. The credit reduction will cause individuals to owe an additional personal income tax on their individual share of the PE’s Connecticut source income. That additional personal income tax may be paid either by participating in a firm composite or by filing an individual nonresident return.
• Law firms may elect annually to file a composite return on behalf of their nonresident Connecticut partners. Prior law allowed firms to participate in a special agreement with the Connecticut Department of Revenue Services (“DRS”) to pay tax on guaranteed payments.
• If the firm does not elect to file a composite for the tax year, nonresident partners must file individually in Connecticut to pay the tax shortfall.
• For taxable years beginning on or after January 1, 2019, firms with annual liabilities of $1,000 or less will not have to make estimated payments. No estimated tax payments are required for the composite filings.
• Waivers of late-payment penalties and the related interest are available for the 2018 taxable year if tax is paid in full within one year of the original due date of the return (i.e., March 15, 2020, for calendar-year filers).

Stay tuned for more information as the DRS releases the 2019 PE Tax and Nonresident Composite Income Tax Forms. Law firms should consider in advance of the 2019 filing season whether or not to elect to file a composite return on behalf of partners and consult with their tax advisors to determine the impact these legislative changes might have on their financial results.

Earlier posts explaining the evolution of the Connecticut PE Tax law can be found below.

• Connecticut Pass-Through Entity Tax and Guaranteed Payments: What Law Firms Need to Know
• Connecticut’s New Pass-Through Entity Tax: Practical Considerations