Connecticut has made significant changes to its pass-through entity tax (PET) in recent years. The most recent changes took effect in 2022.
The original PET was enacted in 2018 as a way to counter the Tax Cuts and Jobs Act (TCJA), which capped the deduction for state and local taxes (SALT) at $10,000. The PET was designed to ensure that high-income taxpayers who owned pass-through businesses still paid their fair share of taxes to Connecticut.
The 2022 changes to the PET include:
- A reduction in the tax rate from 6.99% to 6.75%.
- A new credit for nonresident owners of pass-through entities.
- A new requirement for pass-through entities to make estimated payments of PET.
- A new provision allowing pass-through entities to make a composite income tax return on behalf of their nonresident members.
Here is a more detailed explanation of the changes:
- Reduction in the tax rate: The tax rate was reduced from 6.99% to 6.75%. This is a modest reduction, but it will still save taxpayers some money.
- New credit for nonresident owners: A new credit was created for nonresident owners of pass-through entities. This credit is equal to 90% of the PET paid by the entity. This will help to mitigate the impact of the PET on nonresident taxpayers.
- New requirement for estimated payments: Pass-through entities are now required to make estimated payments of PET. This is similar to the requirement for individual taxpayers to make estimated payments of income tax. This will help to ensure that taxpayers are paying the correct amount of PET throughout the year.
- New provision for composite income tax return: Pass-through entities are now allowed to make a composite income tax return on behalf of their nonresident members. This will simplify the compliance process for businesses with nonresident members.
Overall, the changes to the PET are designed to make the tax more equitable and to simplify compliance for businesses.