United States

Connecticut: Governor’s Budget Recommendations Include Business Tax Changes; Federal Tax Reform Fixes

Feb 12, 2018
From KPMG TaxWatch

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Governor Malloy of Connecticut recently issued his FY 2019 recommended budget adjustments, which are intended to balance the budget adopted last year. The Governor’s proposed revenue-related adjustments include certain tax changes affecting businesses. Other proposed changes are in response to the recent federal tax reforms. On the corporate tax side, the Governor proposes to maintain the corporate surcharge at a rate of eight percent beginning in 2019. Currently, for income tax years commencing on or after January 1, 2018 and prior to January 1, 2019, the surtax rate is ten percent. Another proposed change is to limit the current cap on liability computed under the state’s combined reporting rules to only businesses engaged in manufacturing. On the sales and use tax side, the Governor recommends repealing the sales tax exemption for nonprescription drugs. Other changes include, but are not limited to, increasing hotel occupancy, real estate conveyance, and cigarette taxes, as well as a variety of changes affecting individual taxpayers, such as abolishing an income tax credit for property tax payments and revising the taxation of social security and pension income.

Finally, in response to the recent federal tax reforms, the Governor proposes that Connecticut decouple from certain provisions in the federal code to prevent a revenue loss to the state—notably the 100 percent bonus depreciation allowed under IRC section 168(k). It should be noted that Connecticut has historically decoupled from bonus depreciation. In addition, a new revenue neutral tax on pass-through entities would be imposed, and a corresponding personal income tax credit would apply for tax paid at the pass-through entity level. This provision appears to attempt to shift the liability for income taxes paid by owners of pass-through entities to the pass-through entity itself. Post-tax reform, income taxes imposed on businesses (including on a pass-through entity) remain fully deductible for federal purposes. Another provision to address the limitation on the SALT deduction would allow municipalities to create charitable organizations supporting local interests. Presumably, residents could make payments to these organizations and receive a corresponding credit against property taxes owed. Please stay tuned to TWIST for updates on Governor Malloy’s proposed budget adjustments.

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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.