On May 31, 2018, Connecticut Governor Dan Malloy signed Public Act 18-49, which established a new tax on pass-through entities (PE) doing business in Connecticut that is effective for 2018. Pass-through entities doing business in Connecticut are now subject to a 6.99% entity-level tax on all Connecticut-sourced income. Partners and shareholders in these entities are, however, entitled to a tax credit on their individual or corporate Connecticut tax returns for the taxes paid by the entity.

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This state-level pass-through entity tax is in direct response to the recently passed federal $10,000 cap on individual deductions for state and local taxes paid, enacted as part of the federal Tax Cuts and Jobs Act of 2017 (TCJA). While the concept of an entity-level state tax and corresponding individual state tax credit is straightforward, the implementation of the PE tax has created new challenges that are still being resolved. Presented here is the authors’ current understanding of the mechanics of the PE tax, along with some suggestions for affected taxpayers.


For tax years beginning on or after January 1, 2018, partnerships and S corporations (and all entities taxed as partnerships or S corporations for federal income tax purposes) are subject to a 6.99% entity level tax on all income subject to the PE tax, which can be calculated under one of two tax bases. The standard tax base includes all Connecticut-sourced, separately and nonseparately computed items, adjusted by the personal income tax modifications under Connecticut General Statute section 12-701. The alternative tax base equals—

  • the standard tax base multiplied by the percentage of members subject to Connecticut income tax (directly or indirectly), plus
  • the Connecticut resident portion of unsourced income.

Taxpayers should note that the alternative base, if timely elected with a filed return, may be more beneficial to certain members, including Connecticut residents and those who are not subject to the Connecticut personal income tax (such as C corporations and tax-exempt entities). Additional information on the calculation of the PE tax was issued by the Connecticut Department of Revenue Services (DRS) on June 19, 2018, in OCG-6, Regarding the Calculation of the Pass-Through Entity Tax(http://bit.ly/2MSo4C4).


Partners of partnerships, members of LLCs treated as partnerships for federal income tax purposes, and S corporation shareholders will receive a credit against their individual income tax or the corporate income tax based on their direct and indirect pro rata share of the PE tax paid, equal to 93.01% of the PE tax paid by the pass-through entity and allocated to them. The credit is fully refundable and, for corporate members, may be carried forward until fully utilized. The PE tax is not subject to limitation, but it will be applied only after all other applicable credits have been utilized.

Commonly owned pass-through entities can elect to file a combined PE tax return. For this purpose, “commonly owned” is defined as having at least 80% of the voting control owned, directly or indirectly, by a common owner or owners, either corporate or noncorporate. In a tiered entity structure, the PE tax is applicable at each tier, unless a combined return election is made. In calculating the PE tax, a lower-tier entity subtracts its distributive income or adds its distributive loss, as applicable, received from the upper-tier entity of which it is a member or partner.

Actions to Take

Taxpayers should note that, as opposed to the formerly applicable Connecticut Composite Income Tax, which required only one annual tax payment, the PE tax requires four quarterly estimated payments, due on the 15th day of the fourth, sixth, and ninth month of the current year, as well as the first month of the next taxable year. For calendar year taxpayers, the estimated payments are thus due on April 15, June 15, September 15, and January 15.

The estimated tax payments are based on a calculation involving the lesser of 90% of the amount of the current year’s PE tax or 100% of the prior year’s tax (if the prior year consisted of 12 months and a PE tax return was filed for that year). Given that 2018 is the initial year of the PE tax, all quarterly estimates for 2018 will be based on a calculation of 90% of the current year’s tax.

On June 6, 2018, the DRS released guidance on 2018 estimated payments for purposes of the PE tax. Recognizing that the tax was not enacted until after the first estimated payment would have been due, the DRS will allow taxpayers to comply with their 2018 estimated payment requirements under one of three alternatives:

  • By making the first quarter estimated payment together with the second quarter estimated payment. For calendar year taxpayers, this doubled-up payment was due by June 15.
  • By making three estimated payments, on June 15, September 15, and January 15, each equal to 22.5% of the total tax liability. The remainder of the tax remains due by the return due date.
  • By annualizing estimated payments for the taxable year.

The DRS will also allow reassignment of individual estimated payments to the pass-through entity if those estimated payments were made on April 15, June 15, or September 15; this recharacterization must be completed by December 31, 2018. Further information is anticipated to be made available by the DRS as to how to recharacterize these payments.

Second-quarter estimated payments were required to be mailed to the DRS, with payment by check, accompanied by a paper voucher available on the DRS website. Third-quarter estimated payments are expected to be available to be made electronically via the DRS Taxpayer Service Center.

While tax professionals, taxpayers, and the DRS each work to understand the implementation of the new tax, the authors recommend that CPAs make affected taxpayers aware of the new tax as soon as possible.

Corey Rosenthal, JD is a principal at CohnReznick LLP, New York, N.Y.
Cheryl Povilonis, JD, LLM is a senior sales and local tax associate at CohnReznick LLP, Hartford, Conn.
Cynthia Galamgam, JD, LLM is a state and local tax senior manager at CohnReznick LLP, Glastonbury, Conn.