Legislation has been enacted that changes the Connecticut corporation business tax return filing deadline, the date used to compute estimated tax underpayment penalties, and the filing deadline for W2s and 1099 series information returns, creates a personal income tax adjustment for nonqualified deferred compensation, establishes withholding requirements for pension or annuity distributions, authorizes a withholding tax security deposit requirement, imposes new restrictions and requirements on tax return preparation services, requires information returns for credit or stored-value card payments, amends the definition of “captive real estate investment trusts”, and clarifies the sourcing rules for nonresidents who receive income from pass-through entities.
Sales and use tax (TAXDAY, 2017/07/11, S.3) and other tax provisions (TAXDAY, 2017/07/11, S.2) are reported in separate stories.
Corporation Business Tax Filing Deadline and Estimated Tax Underpayment Penalty
Effective for income years beginning after 2016, the filing deadline for Connecticut corporation business tax returns is changed from the 1st to the 15th day of the month following the due date of the taxpayer’s federal return (May 15 for calendar-year taxpayers). If the taxpayer is not required to file a federal return, the deadline is changed from the 1st day of the 4th month following the end of the income year to the 15th day of the 5th month of that income year.
A change is also made to the date used to compute the penalty for underpayment of estimated tax. Interest at the current rate is imposed from the installment due date to the earlier of:
– the date that the underpayment is actually paid; or
– the 15th day of the 5th month (previously the 1st day of the 4th month) after the close of the tax year.
Deferred Compensation Adjustment
Effective for taxable years beginning after 2016, individuals computing personal income tax liability must include in Connecticut adjusted gross income compensation for services performed in the state that is deferred under a nonqualified deferred compensation plan, if it is not included in federal gross income. Nonqualified deferred compensation plans are employment agreements or arrangements with highly compensated company executives or officers to defer payment of compensation and resulting tax liability until a future year. The addition adjustment does not apply to compensation from qualified plans, bona fide sick leave or vacation plans, disability plans, death benefit plans, or certain medical expense reimbursement arrangements.
Withholding Requirements for Pension or Annuity Distributions
Payers of pension or annuity distributions that maintain an office or transact business in Connecticut must withhold income tax from payments to state residents, effective beginning January 1, 2018. The withholding requirements apply to pension or annuity distributions from an employer pension, an annuity, a profit-sharing plan, a stock bonus, a deferred compensation plan, an individual retirement arrangement (IRA), an endowment, or a life insurance contract. A payer must deduct and withhold from the taxable portion of any distribution, as far as practicable, an amount substantially equal to the tax reasonably estimated to be due from the payee during the calendar year. Lump sum distributions of a resident’s entire account balance, excluding any other tax withholding and any administrative charges and fees, are taxable at the highest marginal personal income tax rate unless:
– any portion of the lump sum distribution was previously taxed; or
– the lump sum distribution is a rollover through a direct trustee-to-trustee transfer.
The method of withholding for all other distributions must be the same method used by employers for wage withholding.
Withholding Tax Security Deposit Requirement
Effective beginning October 1, 2017, the Commissioner for the Department of Revenue Services (DRS) is authorized to require employers or payers to deposit security up to 6 times the employer’s or payer’s estimated withholding tax liability for the previous or next 12-month period. The commissioner is given discretion to increase or lower the security within the maximum amount. The commissioner may also sell the security at public auction, after providing proper notice of the sale to the employer or payer, if it is necessary to recover outstanding taxes, penalties, interest, or other amounts.
Information Returns for Nonpayroll Amounts
Effective beginning January 1, 2018, each payer of nonpayroll amounts, which is not subject to Connecticut withholding requirements, must file copies of 1099 series and other federal information reports with the DRS by January 31 (previously March 31) following the calendar year of payment. The information reporting requirements apply to:
– unemployment compensation payments to recipients who have requested withholding;
– gambling winnings paid to residents that are subject to federal income tax withholding;
– Connecticut lottery winnings that must be reported to the Internal Revenue Service, whether or not withholding is required;
– military retirement paid to Connecticut residents who requested state income tax withholding; and
– nonwage payments to athletes or entertainers from which state income tax withholding is required.
Information Returns for Credit or Stored-Value Card Payments
Under federal law, certain payment settlement entities (e.g., banks) must file an annual information return, Form 1099-K, to report payment card transactions (e.g., credit and stored-value cards, including gift cards) they process for retailers and other payees. The legislation requires those entities to file copies of Form 1099-K with the DRS within 30 days after filing the returns with the IRS.
A penalty of $50 may be imposed for each failure to file if the failure is for not more than one month after it was due. An additional penalty may be imposed of $50 for each month or part of a month that the failure continues, up to $250,000 per year. The penalties may be waived if it is proven that the failure to file was due to reasonable cause and was not due to willful neglect.
The information return reporting requirements for payment card transactions applies to returns due for calendar years beginning on or after January 1, 2017.
Information Return Filing Deadlines
The Connecticut filing deadline for Form 1099 series and W-2 wage information returns is changed from the last day of February to January 31. The change applies to tax years beginning on or after January 1, 2017 and corresponds to the federal filing deadline for information returns. The filing threshold remains $600 or more, except the filing threshold for Form 1099-R information returns is $10 or more.
Prohibited Conduct by Tax Preparers and Facilitators
Effective October 1, 2017, all individuals or business that provide tax preparation services or act as facilitators (i.e., a person engaged in certain activities related to refund anticipation loans) are prohibited from:
– imposing a fee or other consideration for making or facilitating a refund anticipation loan or refund anticipation check other than the originating creditor’s or bank’s fee;
– engaging in unfair or deceptive acts in making or facilitating a refund anticipation loan or refund anticipation check, including any statement that contradicts disclosure requirements under the federal or Connecticut Taxpayer’s Bill of Rights;
– directly or indirectly arranging for a third party, other than the originating bank or creditor, to impose any interest, fee, or charge related to a refund anticipation loan or refund anticipation check;
– taking or arranging for a creditor to take a security interest in a taxpayer’s property interest, other than the proceeds of a tax refund, to secure payment of a refund anticipation loan;
– engaging in collecting an outstanding or delinquent refund anticipation loan for any creditor or assignee;
– materially misrepresenting any fact in obtaining a tax preparer permit;
– failing or refusing to return a taxpayer’s documents within a reasonable period of time;
– failing or refusing to provide a taxpayer, for the taxpayer’s own records, with a copy of any document requiring the taxpayer’s signature within a reasonable time after signing the document;
– failing to maintain a copy of a prepared return for a period of 4 years from the later of the return’s due date or completion date;
– requiring or allowing a taxpayer to sign blank or incomplete tax forms;
– requiring a taxpayer to designate the tax preparer or facilitator as the payee for a federal or state personal income tax refund; or
– requiring a taxpayer to designate and use a specific financial institution, debit card, or stored value card provider for the purposes of a federal or state personal income tax refund.
In addition, refund anticipation loan applications or agreements from tax preparation services cannot include:
– a hold harmless clause;
– a confession of judgment clause;
– any assignment of or order for payment of wages or other compensation for services;
– a waiver of any provision of the federal or Connecticut Taxpayer’s Bill of Rights; or
– a waiver of the right to class action or injunctive, declaratory, or other equitable relief.
Finally, each tax preparer must sign the return and include his or her preparer tax identification number issued by the IRS.
A penalty may be imposed on any individual or business that engages in prohibited conduct of $500 for each violation. The penalty may be waived if it is proven that the violation was due to reasonable cause and not intentional or due to neglect.
Tax Preparer and Facilitator Permit and Disclosure Requirements
Beginning January 1, 2019, a nonexempt individual is prohibited from engaging in tax preparation services, advertising or soliciting those services, acting as a facilitator, or making representations to be a tax preparer or facilitator without a permit issued by the DRS. A penalty of $100 per day may be imposed on any tax preparer or facilitator who provided tax preparation services or who acted as a facilitator without a permit. A penalty of $500 for each violation may be imposed on any tax preparer, facilitator, or tax return preparation business that employs an individual to provide tax preparation services or act as a facilitator without a permit.
Permit eligibility.— A permit applicant must be 18 years or older and must have:
– a high school diploma;
– a preparer tax identification number (PTIN) issued by the IRS;
– evidence that demonstrates the applicant has experience, education or training in tax preparation services; and
– beginning January 1, 2020, a certificate of completion of an IRS annual filing season program.
A permit may be issued to applicants who show they are authorized to act as a tax preparer or facilitator in a state that has professional requirements substantially similar to the requirements for tax preparers or facilitators in Connecticut.
Permits are effective for 2 years. Applicants must pay a $100 initial application fee and a $50 renewal application fees. Tax preparers and facilitators must update information provided to the DRS following the issuance or renewal of a permit if it is no longer accurate.
Disclosure requirements.— Before providing tax preparation services, a nonexempt tax preparer must provide to any client requesting those services a written disclosure that includes:
– the preparer’s name, principal business address and primary business telephone number;
– an estimate of the total charge for all requested tax preparation services; and
– a warranty that the tax preparer will securely store and transmit a taxpayer’s personal and tax record information by encryption or other means.
Exemptions.— The tax preparer and facilitator permit and disclosure requirements do not apply to:
– accountants who hold an active license issued by the Connecticut Board of Accountancy or a valid and active permit, license or similar professional credential issued by another U.S. jurisdiction;
– attorneys and anyone who provides tax preparation services under the supervision of an attorney;
– individuals enrolled to practice before the IRS under Circular 230;
– employees of a local, state, or federal agency while engaged in their official duties;
– employees or assistants of tax preparers or any exempt individual in the course of their official duties for the preparer or exempt individual;
– employees who act as tax preparers exclusively for the business purposes of their employer;
– anyone who acts as a fiduciary for an estate; and
– IRS qualified tax preparers, including those sponsored by the Tax Counseling for the Elderly program or the Volunteer Income Tax Assistance program.
Permit denial, suspension, or revocation.— The DRS may deny, revoke, or suspend a permit if a tax preparer or facilitator engages in any of the following activities beginning October 1, 2018:
– engaging in a criminal act resulting in conviction, if the act is substantially related to their qualifications as a tax preparer or facilitator;
– engaging in unprofessional conduct resulting in disciplinary action by the federal or state government, any other governmental agency, or a professional licensing board, if the conduct is substantially related to their qualifications as a tax preparer or facilitator;
– obtaining or attempting to obtain a permit by material misrepresentation or fraud; or
– violating, attempting to violate, or assisting in the violation of the permit requirements, activities by tax preparers or facilitators, and disclosures.
The DRS may issue a written order notifying a tax preparer or facilitator that their permit is suspended or revoked for good cause. The tax preparer or facilitator will have the right to request, in writing, a hearing within 30 days after the date of the notice. A hearing must be held with 30 days after the DRS received the request. A final decision on the order, which the tax preparer or facilitator may appeal, must be issued within 60 days after the DRS received the hearing request.
Delinquent Taxpayer List
The legislation requires the DRS Commissioner to submit a list of delinquent corporation business taxpayers only if the Office of Policy and Management (OPM) secretary requests it. The commissioner may include taxpayer identification numbers. Under previous law, the commissioner was required to submit the list annually with taxpayer identification numbers arranged in sequential order.
Captive Real Estate Investment Trusts
The definition of “captive real estate investment trusts” (captive REITs) is amended by excluding any voting power, beneficial interests or shares in a REIT that are directly owned or controlled by a life insurance company in a segregated asset account. A captive REIT is a REIT where more than 50% is owned or controlled, directly or constructively, by a single entity and where the REIT is not regularly traded on an established securities market. Captive REITs computing Connecticut corporation business tax liability must add back any federal deduction claimed for dividends paid.
Sourcing of Pass-Through Entity Income
Under current law, a nonresident’s income from Connecticut sources includes gains or losses from the sale or disposition of an interest in a partnership, limited liability company (LLC), or S corporation that owns real property in Connecticut, if the real property, at the time of the sale or disposition, has a fair market value of 50% or more of all the assets that the entity owned for the previous two-year period. The legislation clarifies that the entity may own this property directly or indirectly.
Act 17-147 (H.B. 7312), Laws 2017, effective July 7, 2017 and as noted