The Tax Cuts and Jobs Act of 2017 made significant revisions to federal personal income taxation. In response, the Connecticut General Assembly enacted legislative changes that affect the Connecticut personal income tax calculation. This article will provide CPAs with an overview of how these critical changes will impact the current tax compliance season.
Modification of IRC Section 168(k) Bonus Depreciation
For taxable years beginning on or after January 1, 2017, a taxpayer who deducts Internal Revenue Code (IRC) section 168(k) bonus depreciation on his federal income tax return for property placed in service after September 27, 2017, must add back such deduction when computing Connecticut adjusted gross income. Where there is an add-back of bonus depreciation for a year, the taxpayer may deduct 25% of the disallowed deduction for each of the four succeeding tax years, beginning with the year following the year of the add-back. The foregoing applies to individuals, partnerships, LLCs treated as partnerships for income tax purposes, and S corporations.
Modification of IRC Section 179 Deduction
For taxable years beginning on or after January 1, 2018, taxpayers must add back 80% of the IRC section 179 deduction taken for federal income tax purposes. The amount added back may be deducted over the four succeeding tax years (25% per year), beginning with the year following the year of the add-back. The foregoing applies to individuals, partnerships, LLCs treated as partnerships, and S corporations.
Subtraction Modification of Bioscience Investment Income
Beginning on or after January 1, 2018, a general partner of a qualified venture capital fund (as defined in the Code of Federal Regulations) can, in calculating Connecticut adjusted gross income, subtract the income generated by investments in eligible Connecticut bioscience businesses that was included in federal adjusted gross income. For this purpose, a general partner is a partner of a general partnership, a general partner of a limited partnership, and a partner of a limited liability partnership. General partners should use Schedule CT-BIO, Bioscience Worksheet, to calculate the amount to be subtracted.
Payment by Pass-Through Entities on Behalf of Nonresident Partners and Shareholders
Beginning on or after January 1, 2018, partnerships and S corporations doing business in Connecticut or with Connecticut-sourced income are no longer required to pay Connecticut income tax on behalf of their nonresident partners or shareholders. Note, however, that these entities are subject to a new pass-through entity (PTE) tax effective January 1, 2018. Accordingly, partners/s corporation shareholders may receive a PET credit that can be applied against Connecticut personal income tax or corporation business tax.
Penalty for Failure to Disclose Reportable Transactions
After January 1, 2018, audits of returns where there is a failure to disclose a reportable transaction (as defined in IRC section 6707A) that is also required to be disclosed for federal purposes will be subject to a 75% penalty. Prior to January 1, 2018, the penalty applied to “listed transactions.” A notice of deficiency assessment of the 75% penalty with respect to returns that fail to disclose a reportable transaction may be mailed at any time not later than six years after the subject return was filed.
More Changes to Come
Because Connecticut is facing a large budget deficit, additional tax changes are expected for the 2019 legislative session. Most recently, Connecticut’s new governor proposed massive sales and use tax changes that affect most industries, including a proposal for sales tax on professional accounting services. CPAs need to continue to monitor state and local tax changes in each taxing jurisdiction and how such changes affect their respective clients.