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Connecticut: New partnership-level tax, in response to federal tax changes

Connecticut: New partnership-level tax

The Connecticut legislature passed Senate Bill 11 that, once enacted, would make certain changes to Connecticut’s tax laws in light of federal tax reform—including a new mandatory entity-level tax imposed on partnerships and S corporations doing business in the state.

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This new tax would be effective for tax years beginning on or after January 1, 2018. 

The impetus behind the new entity-level tax on partnerships and S corporations is that under the new federal tax law (Pub. L. No. 115-97, enacted December 22, 2017), the state and local tax deduction for individuals is capped at $10,000 per year. No such limit applies to state and local taxes deducted by business entities. Thus, if the business entity (as opposed to the partner/shareholder) is paying Connecticut income tax, the business entity will be allowed to deduct the taxes for federal purposes. 

The Connecticut legislation would allow the owners of the business entity to take a corresponding tax credit against their Connecticut income taxes for the taxes paid at the business-entity level. This revised structure would likely benefit Connecticut resident partners/owners, but may have harsh consequences for out-of-state partners/owners and the entities themselves. 

 

Read a May 2018 report [PDF 228 KB] prepared by KPMG LLP

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