United States

Connecticut: Legislature Passes Many Tax Changes during Special Session

Dec 21, 2015
From KPMG TaxWatch

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Recently, Governor Malloy called Connecticut lawmakers into a special session to address an estimated $350 million mid-year budget deficit. During the session, Governor Malloy also urged legislators to adopt certain business tax changes aimed at improving the state’s business climate. Many of these changes are in response to and make modifications to the significant tax increases and other changes enacted law in June 2015.

During the special session, lawmakers passed legislation (Senate Bill 1601) implementing a variety of spending reductions and several tax changes. On the individual income tax side, Senate Bill 1601 adopts a bright-line test for determining when a nonresident individual working for a limited time in Connecticut becomes liable for Connecticut personal income taxes. Under current law, employers do not have to withhold until an employee works in the state for more than 15 days; however, the 15-day test did not extend to individual income tax liability. Under the new law, compensation for personal services rendered in Connecticut by a nonresident employee who is present in Connecticut for no more than fifteen days during a taxable year will not constitute income derived from in-state sources, effective for tax years commencing on or after January 1, 2016. Once the fifteen threshold is crossed, all compensation received by the employee for rendering personal services in Connecticut during the tax year will constitute income derived from sources within the state. Presence in the state for part of a day constitutes being in the state for the entire day unless the employee is in Connecticut for purposes of transit. These bright-line provisions apply only to compensation for personal services rendered by a nonresident employee and do not apply to sources of income derived by an athlete, entertainer or performing artist.

For Corporation Business Tax (CBT) purposes, Senate Bill 1601 adopts single-sales factor apportionment effective for income years beginning on or after January 1, 2016. The mandatory single sales factor provision does not modify the sourcing of receipts. Taxpayers that currently use special industry formulas (e.g., financial service companies, motor carriers, broadcasters, and securities brokers) will continue to do so. Taxpayers—generally defense contractors—that derive 75 percent or more of their gross receipts from sales of tangible personal property to the U.S. government may continue to make an irrevocable, five-year election to use a four-factor double-weighted sales formula.

Other provisions of Senate Bill 1601 make certain changes to the mandatory unitary combined reporting provisions that were enacted in June. The changes are effective for income years beginning on or after January 1, 2016 and include, but are not limited to:

  • Clarifying that distributive share income received by a limited partner from an investment partnership is not considered derived from a unitary business unless the general partner of the investment partnership and the limited partner have common ownership.
  • Providing that the principles set forth in the federal consolidated return regulations promulgated under IRC § 1502 apply to the extent consistent with Connecticut’s combined reporting law. Previously, Connecticut specifically adopted only the deferral provisions in 26 CFR 1.1502-13.
  • Eliminating provisions requiring any group member (wherever incorporated) earning more than 20 percent of its gross income from intangible property or service-related activities the costs of which are generally deductible for federal income tax purposes against the income of other group members from being included in the water’s-edge group.
  • Striking the mandate that the Commissioner publish a list of tax haven countries by September 30, 2016 and specifically stating that a tax haven does not include a jurisdiction that has entered into a comprehensive income tax treaty with the U.S.
  • Allowing a combined group with unused NOLs in excess of $ 6 billion from income years beginning prior to 2013 to 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 current 50 percent limitation. However, for any income year commencing on or after January 1, 2015, taxpayers making the NOL election may not lower the tax below $2.5 million. 

One of the more significant changes is the adoption of a cap on liability computed under the new combined reporting rules. Notably, in no event may the unitary group’s tax (before the surtax and application of credits) exceed the nexus combined base tax by more than $2.5 million. The “nexus combined base tax” equals the tax measured on the sum of the separate net income/loss or the minimum tax base of each taxable member as if such income/loss or minimum base was separately apportioned. In computing net income/loss, intercorporate dividends are eliminated. Intangible expenses and costs and interest expenses (as defined) and any income attributable to such intangible and interest expenses and costs are eliminated provided that both the payor and payee are both taxable members of the combined group. In computing the combined additional tax base for purposes of the nexus combined base cap, intercorporate stock holdings are eliminated. In computing the apportionment fraction for purposes of the nexus combined base, intercompany rents and intercompany business receipts are not included if between taxable members included in the combined return.

On or after July 1, 2015 a new credit is created for corporations meeting certain employment requirements that are engaged in bioscience, clean technology or cybersecurity in an Enterprise Zone. The credit is equal to 100 percent of tax liability for the first three years and 50 percent of tax liability for the next seven years. In addition, the apprenticeship tax credit is also revised. Finally, Senate Bill 1601 eases the limitations on use of certain excess credits. “Excess credits “are remaining credits available under section 12-217j (tax credit for research and experimental expenditures, section 12-217n (rolling tax credit for research and development expenses) or section 32-9t (urban and industrial site credits). Historically, corporations were able to use tax credits to reduce their CBT liability by up to 70 percent in any income year. For income years beginning on or after January 1, 2015, the budget legislation reduced the maximum amount of tax that may be offset with credits to 50.01 percent of the tax due. Senate Bill 1601 provides that taxpayers with “excess credits” after application of the 50.01 percent limitation, may use the credits as follows:

  • For income years commencing on or after January 1, 2016, and prior to January 1, 2017, the aggregate amount of tax credits and excess credits allowable may not exceed 55 percent of the amount of CBT due;
  • For income years commencing on or after January 1, 2017, and prior to January 1, 2018, the aggregate amount of tax credits and excess credits allowable may not exceed 60 percent of the amount of CBT due;
  • For income years commencing on or after January 1, 2018, and prior to January 1, 2019, the aggregate amount of tax credits and excess credits allowable may not exceed 65 percent of the amount of CBT due;
  • For income years commencing on or after January 1, 2019, the aggregate amount of tax credits and excess credits allowable may not exceed 70 percent of CBT due for the tax year.

At time of publication, Senate Bill 1601 is still pending signature. Please contact Rick Hill at 860-297-5044 or Steve Kralik at 860-297-5431 with questions. 

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.