Connecticut Issues Guidance on Pass-Through Entity Tax

Connecticut issued guidance on 2018 estimated tax requirements for its new pass-through entity tax. The tax applies to:

  • S corporations;
  • partnerships; and
  • limited liability companies treated as partnerships and S corporations for federal income tax purposes.

Pass-through entities must pay estimated tax in four installments by:

  • April 15;
  • June 15;
  • September 15; and
  • January 15 of the next tax year.

How Do Pass-Through Entities Comply With 2018 Estimated Tax Requirements?

Pass-through entities can comply with their requirements by:

  • making a “catch-up” payment with the June 15, 2018 installment;
  • making 3 estimated payments; or
  • annualizing estimated payments for the tax year.

A catch-up payment satisfies both the pass-through entity’s 1st and 2nd estimated tax installments. A pass through that chooses to make 3 installments must pay estimated tax as follows:

  • 22.5% by June 15, 2018;
  • 22.5% by September 15, 2018;
  • 22.5% by January 15, 2019; and
  • the remaining balance with its annual return on March 15, 2019.

How Do Pass-Through Entities Comply With 2018 Estimated Tax Requirements?

A pass-through entity can make its estimated payment, including the June 15, 2018 installment, by completing an estimated tax payment coupon, Form CT-1065/CT-1120SI ES. The pass-through entity must mail the payment coupon along with a check to the Connecticut Department of Revenue Services (DRS).

A pass-through entity can also make its estimated payments electronically at www.ct.gov/tsc starting with its September 15, 2018 installment.

Can Pass-Through Entities Apply Their Owner’s 2018 Estimated Tax Payments?

Pass-through entities can recharacterize all or a portion of any estimated tax payments made by any of their owners. The owners must consent to the recharacterization.

The pass-through entity must complete the process by December 31, 2018. Connecticut will consider the recharacterized amount to have been paid by the pass-through entity on the date that the individual partner made the payment.

What Is the Impact on Individual Pass-Through Entity Owners?

Individual pass-through entity owners get a credit for the tax paid by the entity. Consequently, many individual and trust owners no longer need to make estimated payments.

Individual pass-through entity owners must still pay estimated tax if the owner:

  • received income from other Connecticut sources; or
  • is an employee who will not have enough income tax withheld from their wages.

Fiscal Year Pass-Through Entities

Owners of fiscal year pass-through entities will likely need to continue to pay 2018 estimated income tax. The owners must include their distributive share from 2018 on their 2019 income tax return. Consequently, they cannot claim the credit for tax paid for 2018 until the owner files a 2019 Connecticut income tax return.

What if an Individual Owner Already Paid 2018 Estimated Income Tax?

If the owner already paid the tax, the owner can either:

  • receive a refund; or
  • recharacterize the payments so they are applied to the pass-through entity’s 2018 estimated tax requirements.

Pass-through entity owners that scheduled automatic payments through the DRS or third party software can cancel those payments. Otherwise, owners must contact the DRS at least 2 days before a scheduled payment date.

What Is the Impact on Corporate Partners or Members?

The DRS anticipates that most pass-through entities controlled by corporate partners or members will elect the annualized method of calculating the tax. If they do, the corporation must continue to pay estimated tax on its distributive share of income.

What if a Pass Through Underpays Estimated Tax?

A pass-through entity that receives an underpayment notice for 2018 estimated tax can contact the DRS. The pass-through entity must provide a written explanation of why it failed to comply along with all supporting documentation.

Special Notice 2018(4), Connecticut Department of Revenue Services, June 6, 2018, ¶401-864

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