As my readers know, I’ve been anticipating strong state responses to some of the more onerous aspects of the Tax Cuts and Jobs Act (TCJA). Well, Connecticut Governor Dannel Malloys “An Act Concerning Connecticut’s Response to Federal Tax Reform” (The Act) is a major shot in what I expect will be a long war. One key provision of the Act is the Pass-Through Entity Tax (PET).
PET is designed to be revenue neutral to both the State and taxpayers. The TCJA limited the deductibility of state and local taxes paid by individuals to $10,000 and pass through entities (PTE) with Connecticut source income are now required to pay a tax on that income at a rate of 6.99% -- the highest individual tax rate. Malloy is trying to work around this. Under the Act, members of the PTE will receive a credit on their Connecticut personal income tax return equal to their pro-rata share of entity income multiplied by 93.01%.
Here’s how it works:
- AB partnership is owned equally by A, a Connecticut resident, and B a nonresident. The partnership earns $1,000,000 before taxes in 2018, all Connecticut source. AB will pay a PET of $69,900 (1,000,000 * 6.99%). A and B will each have $465,050 of income from AB (($1,000,000 - $69,900)/2).