Connecticut makes income tax changes and insurance tax changes in its biennium budget bill. The legislation:
- extends the time period over which certain combined reporting group members may claim a FAS 109 corporation business tax deduction;
- lowers the tax rate on insurance premiums and HMO subscriber charges;
- increases the personal income thresholds for the Social Security income tax deduction;
- phases-in a personal income tax deduction for retirement income;
- creates an organ donation and crumbling concrete foundation deduction;
- establishes a brownfield redevelopment program credit;
- authorizes a research and development (R&D) credit exchange and auction program; and
- makes changes to the film and digital media production, earned income tax, and neighborhood assistance credits.
FAS 109 Deduction
Beginning with the 2018 income year, certain publicly traded companies that are members of a Connecticut combined reporting group may claim a corporation business tax deduction (FAS 109 deduction), if combined reporting results in an aggregate:
- increase in the combined group’s net deferred tax liabilities
- decrease in their net deferred tax assets; or
- change from a net deferred tax asset to a net deferred tax liability.
“Net deferred tax liability” is the excess of the combined group’s deferred tax liabilities over its deferred tax assets. “Net deferred tax asset” is the excess of the group’s deferred tax assets over its deferred tax liabilities. Both must be computed using generally accepted accounting principles (GAAP).
In addition, the FAS 109 deduction is available only to publicly-traded companies, including affiliated corporations participating in the company’s financial statements prepared using GAAP rules. It is equal to 1/30th of the amount necessary to offset the change in deferred tax liabilities or assets and may be claimed over a 30 year period. Previously, the deduction was 1/7th of the offset amount over a 7 year period.
Finally, the deduction cannot be reduced as a result of any events happening after its calculation, including any transfer or abandonment of assets. There is no longer a requirement that companies calculate the deduction regardless of its impact on federal taxes. Any excess deduction may be carried forward and applied as a deduction against a unitary group’s net income in future income years until it is fully used by the group.
Insurance Tax Rate Reduction and Credit Cap
The tax rate on all net direct premiums received on or after January 1, 2018, by Connecticut, out-of-state, and foreign insurers is reduced from 1.75% to 1.5%. The tax rate on total net direct subscriber charges received by HMOs is also reduced from 1.75% to 1.5%.
In addition, the three-tiered insurance premium tax credit cap structure that expired for calendar years beginning after 2016 is restored and no longer temporary. The cap:
- classifies insurance premium tax credits into three types;
- specifies the order in which an insurer must apply the three credit types to offset liability; and
- establishes the maximum liability that an insurer can offset by claiming one or more of these types of credits.
Social Security Income Tax Deduction
Effective for tax years beginning after 2017, individual taxpayers may deduct 100% of Social Security income, if federal adjusted gross income (AGI) is less than:
- $75,000 for single filers and married taxpayers filing separately; or
- $100,000 joint filers and heads of household.
Further, taxpayers with incomes equal to or greater than the thresholds qualify for a 75% deduction. The income thresholds are increased from $50,000 and $60,000, respectively.
Retirement Income Tax Deductions
Effective beginning with the 2019 tax year, individual taxpayers may deduct a portion of retirement income that is included in federal gross income, if federal AGI is below:
- $75,000 for single filers, married taxpayers filing separately, and heads of households; or
- $100,000 for married taxpayers filing jointly.
The deduction is equal to:
- 14% of pension or annuity income for the 2019 taxable year;
- 28% of that income for the 2020 taxable year;
- 42% of that income for the 2021 taxable year;
- 56% of that income for the 2022 taxable year;
- 70% of that income for the 2023 taxable year;
- 84% of that income for the 2024 taxable year; and
- 100% of that income for the 2025 taxable year.
Under current law, military and railroad retirement that is included in federal gross income is fully deductible.
An increase in the teacher retirement system income tax deduction from 25% to 50% is delayed from 2017 until 2019.
Organ Donation Expense Deduction
Individual taxpayers who donate human bone marrow or all or part of a human liver, pancreas, kidney, intestine or lung for a transplantation occurring on or after January 1, 2017 may deduct up to $10,000. The deduction covers lost wages and medical, travel and housing expenses.
Crumbling Concrete Foundation Deduction
Effective for tax years beginning after 2016, any financial assistance received from the new Crumbling Foundations Assistance Fund or paid to or for a residential building owner may be deducted from Connecticut income tax liability, if the amount is included in the taxpayer’s federal gross income. A “residential building” is a dwelling for up to 4 families, including a condominium unit or dwelling in a planned unit development.
7/7 Brownfield Redevelopment Program Credit
Effective for years beginning after 2016, property owners that redevelop and use a brownfield site under the 7/7 Brownfield Redevelopment Program qualify for:
- corporation business and personal income tax credits for tax liability from business operations at the site during the first 7 years after the redevelopment project’s completion; and
- corporation business and personal income tax deductions for qualifying site investigation, assessment, and remediation expenses in years 8 through 14 after the project’s completion.
The property owner must notify the Connecticut Department of Revenue Services (DRS) and the Department of Economic and Community Development (DECD) about the project’s completion.
A “brownfield” is property that has been abandoned or underused for 10 or more years because of pollution in the buildings, soil or groundwater that requires investigation or remediation before the property’s redevelopment, reuse, or expansion. The tax deductions include expenses for:
- soil, groundwater and infrastructure investigation;
- remediation of soil, sediments, groundwater or surface water;
- hazardous materials or waste removal and disposal;
- long-term groundwater or natural attenuation monitoring;
- environmental land use restrictions, activity and use limitations, or other forms of institutional control;
- reasonable attorneys’ fees;
- planning, engineering and environmental consulting; and
- remedial activity to address building and structural issues.
In addition, eligible property owners must also submit a plan and commit to:
- train local high school and technical college students for work at the redeveloped property;
- hire at least 30% of those students for its workforce at the property.
R&D Credit Exchange and Auction Program
The Connecticut DECD must establish a program to allow corporation business taxpayers to use accumulated (“stranded”) credits for nonincremental R&D expenses in exchange for capital projects in the state that:
- expand the scale or scope of the taxpayer’s business;
- increase employment at the business; or
- generate a substantial return to the state economy.
Also, the DECD, in consultation with the DRS and the Connecticut Innovations corporation, must hold tax credit auctions or enter into agreements to allow taxpayers holding stranded incremental and nonincremental R&D credits to use the credits in exchange for investments in the taxpayer’s corporate venture capital fund. Investments in a venture fund cannot be less than $5 million or more than $10 million. All investments must be in Connecticut:
- start-up businesses; or
- spin-off companies from the taxpayer’s R&D department.
The taxpayer must agree to reinvest the profits from the investments in its corporate venture fund.
The credits for venture capital investments may be claimed against corporation business tax liability beginning on and after July 1, 2020. The credit is not subject to Connecticut’s annual cap on the total amount of all credits that may be claimed against corporation business tax liability. Taxpayers may sell, assign, or transfer part or all of the credits.
The total amount of credits used, at full value, for capital projects and venture capital investments may not exceed $50 million.
Film and Digital Media Production Credits
The DECD is permanently banned from issuing corporation business or insurance premium tax credits to film and digital media production companies that were not designated as state-certified productions before July 1, 2013. A temporary ban on the new credits expired July 1, 2017. The credit ban does not apply to production companies that:
- conduct at least 25% of their principal photography days in a Connecticut facility;
- receive at least $25 million in private investment; and
- opened for business on or after July 1, 2013.
STEM Graduate Credit
Effective for tax years after 2018, a personal income tax credit may be claimed by individuals who:
- are employed in Connecticut;
- receive a bachelor’s, master’s, or doctoral degree in a science, technology, engineering, or math (STEM) field on or after January 1, 2019; and
- live in Connecticut or move to the state within 2 years after receiving the degree.
The credit is refundable and may be claimed for five taxable years after the date of graduation.
Earned Income Tax Credit
Effective after 2016, Connecticut residents who qualify for the federal earned income tax credit (EITC) may claim a state income tax credit for 23% of the federal credit. The Connecticut EITC was scheduled to increase from 27.5% to 30% of the federal credit.
Property Tax Credit
Effective for the 2017 and 2018 taxable years, the personal income tax credit that Connecticut residents may claim for property tax paid on a primary residence is limited to individuals who:
- are age 65 or older before that year ends; or
- may validly claim at least 1 dependent on their federal income tax return for that year.
The maximum credit, which starts to phase out based on a taxpayer’s filing status and Connecticut AGI, is $200.
Neighborhood Assistance Credit
The annual cap on the Neighborhood Assistance Act (NAA) tax credit is reduced from $10 million to $5 million. The credit may be claimed against corporation business and insurance premiums tax liability for a portion of cash investments of $250 or more in certain community programs that have received both municipal and state approval.
S.B. 1502, Laws 2017, effective October 31, 2017 and as noted