Last year, the Connecticut General Assembly enacted the pass-through entity tax at the flat rate of 6.99% on most pass-through entities, including partnerships, S corporations and limited liability companies that are treated as partnerships or S corporations for federal income tax purposes. Initially, each individual owner of a pass-through entity was entitled to a refundable credit against the personal income tax equal to 93.01% of the owner’s pro rata share of the tax liability of the pass-through entity. This year, the General Assembly amended the statutes governing the pass-through entity tax so as to, among other things, reduce the credit to 87.5% of the owner’s pro rata share of the tax paid by the pass-through entity, effective for taxable years commencing on or after January 1, 2019.
This year the General Assembly also clarified that a nonresident individual owner of a pass-through entity is not required to file a Connecticut income tax return for any taxable year if the individual meets two requirements. First, if the individual’s (including the individual’s spouse if filing a joint return) only source of Connecticut income is from one or more pass-through entities and second the aggregate pass-through entity tax credit allowed to the individual for that taxable year must fully satisfy the Connecticut tax due for that year.
Our 2019 Connecticut Tax Alert raised the question as to whether or not a pass-through entity will be able to file a return and pay taxes on behalf of nonresident partners notwithstanding the reduction of the credit percentage. On August 16 the Connecticut Department of Revenue Services addressed this question by publishing Special Notice 2019(6) (SN 2019(6)) and by updating Office of the Commissioner Guidance No. 7 (OCG-7).
OCG-7 appears to offer an interpretation of the aforementioned law change. Pursuant to OCG-7 a nonresident individual whose only source of Connecticut income is from a pass-through entity is not required to file a Connecticut income tax return if (1) the individual receives a Schedule CT K-1 and the PE Tax Credit properly reported fully satisfies his or her Connecticut income tax liability; or (2) the pass-through entity remits Composite Income Tax on behalf of the nonresident individual in accordance with the procedures set forth by DRS.
SN 2019(6) delves further into the issues and makes available for tax years beginning on or after January 1, 2019 a composite tax return. Specifically, according to the notice, the Department of Revenue Services will allow a pass-through entity to make an annual election to remit composite income tax on behalf of its nonresident individual members. The filing of the composite income tax return will excuse nonresident members from filing their own Connecticut income tax returns if their only source of Connecticut income is from the electing pass-through entity.
Neither the OCG or the Special Notice appears to address situations where a nonresident member has Connecticut source income from multiple pass-through entities, all of which elect to pay the composite tax on behalf of their members.
Interestingly, OCG-7 does provide that in the case of a nonresident member who is excused from filing, and who does not choose to file an individual Connecticut income tax return, the individual’s return will be deemed to be filed on the day their pass-through entity files its pass-through entity tax return.