Connecticut Tax Law Changes Enacted (article)
On December 29, 2015, Connecticut Governor Dan Malloy signed into law Senate Bill 1601 (SB 1601). Effective for income tax years beginning on or after January 1, 2016, numerous changes have been made to the corporation business tax mandatory unitary taxation laws. While there are many changes associated with the legislation, the following are some key changes as they relate to apportionment, combined reporting, nonresident personal income tax, and the cap on excess tax credits.
Connecticut Single Sales Factor Apportionment
Historically, taxpayers used different apportionment formulas in Connecticut depending on their entity classification. With a few exceptions, net income from business other than the manufacture, sale or use of tangible personal or real property was apportioned using a single sales factor, while the net income derived from the manufacture, sale or use of tangible personal or real property was apportioned using a three-factor formula with a double-weighted sales factor. SB 1601 requires most taxpayers to use a single sales factor apportionment for taxable years beginning on or after January 1, 2016.
Connecticut Combined Reporting Changes
In June 2015, Connecticut enacted mandatory unitary combined reporting for tax years beginning on or after January 1, 2016. SB 1601 enacts the following changes to Connecticut’s combined reporting provisions for tax years beginning on or after January 1, 2016, unless stated otherwise:
- The distributive share of income received by a limited partner from an investment partnership shall not be considered to be derived from a unitary business unless the general partner of such investment partnership and such limited partner have common ownership.
- The principles set forth in the Treasury regulations promulgated under Section 1502 of the Internal Revenue Code, including the principles relating to deferrals, eliminations, and exclusions, shall apply to the extent consistent with the Connecticut combined group membership and combined unitary reporting principles.
- Taxpayers are granted the right to apportion income to each taxable member of a unitary combined group if a member of the group is a financial services company.
- The assets and liabilities attributable to transactions with another member of the unitary combined group are eliminated from the Connecticut unitary group capital base calculation when computing the capital tax base.
- Taxable members of the combined group that are financial service companies are subject to a capital base tax equal to $250.
- In no event shall the tax calculated for a combined group on a combined unitary basis, prior to surtax and application of credits, exceed the nexus combined base tax by more than $2.5 million. The nexus combined base tax generally equals the sum of the tax of each taxable member as determined on a separate company basis.
- Any group member (wherever incorporated) earning more than 20 percent of its gross income from intangible property or providing services to members of the group is eliminated from inclusion in the Connecticut unitary group.
- The mandate that the Commissioner publish a list of tax haven countries is eliminated, specifically stating that a tax haven excludes a jurisdiction that has entered into a comprehensive income tax treaty with the United States.
- A combined group with unused NOLs greater than $6 billion from income tax years beginning prior to 2013 may elect to relinquish 50 percent of their NOL carryovers incurred prior to the income year commencing on or after January 1, 2015 and before January 1, 2016. If the election is made, the remaining losses may be used without regard to the 50 percent limitation.
- A non-U.S. corporation that is a member of a Connecticut unitary combined group is to include income in the combined report based on its profit and loss statement. It is not limited to the company’s income that is effectively connected with the conduct of a U.S. trade or business.
Connecticut Nonresident Personal Income Tax
For taxable years beginning on or after January 1, 2016, compensation paid to a nonresident individual for personal services who is present in Connecticut for fewer than sixteen part or whole days (other than solely for purposes of transit) is excluded from income tax. This exclusion does not apply to an athlete, entertainer, performing artist, or member of an athletic team.
Connecticut Tax Credit Cap Increase
SB 1601 eases the limitations on use of certain excess credits. Excess credits include credits for expenditures on research and development and credits for investments in urban and industrial site development projects. Beginning with taxable years commencing in 2016, Connecticut incrementally increases the credit allowed to a corporate taxpayer that possesses an “excess credit” from 50.1 percent to 70 percent over a four-year period. Other corporate taxpayers will continue to be subject to the current 50.1 percent cap.
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