June 10, 2015
Connecticut Tax Law Changes for 2015 Tax Year
On June 4, 2015, the Connecticut General Assembly passed budget bill H7061 which encompasses a wide range of controversial tax changes to all facets of Connecticut taxation including corporate income tax, personal income tax, and sale and use taxes.
Highlights of the bill are as follows:
- Mandatory unitary combined reporting.
- Extension of the 20% corporate surcharge.
- Limits on net operating loss carryovers for corporations.
- Limits on the use of corporate tax credits.
- A higher personal income tax rate for high income earners.
- Reduction in the property tax exemption.
- A delay in income tax reductions for single filers.
- An increase in the sales tax rate for computer services, from 1% to 2% effective October 1, 2015 and to 3% effective October 1, 2016.
- An increase in the sales tax rate on luxury items from 7% to 7.75.
This change, retroactive to January 1, 2015, replaces the current combined reporting provisions and applies to unitary combined reporting. This will apply to a group of corporations engaged in a "unitary business," defined as a single economic enterprise that is interdependent, integrated or interrelated enough through its activities to provide mutual benefit and produce significant sharing or exchanges of value among its entities or a significant flow of value among its separate parts.This can relate to the separate parts of a single entity or a group of entities under common ownership, including businesses conducted or connected to pass-through entities such as partnerships and S-Corporations. Common ownership will exist if the same entity or entities, including individuals, directly or indirectly own more than 50% of the voting control of the entities, regardless of whether the owner or owners are part of the combined group. Indirect control will be determined under IRC section 318, and the combined group will include all the companies under common ownership as long as one of the members of the group is subject to Connecticut corporations tax.
A combined group has the ability to elect either a worldwide basis or affiliated group basis; if an election is not made, the group will default to a "water's edge" basis which includes taxable members (those entities taxable in CT) and non-taxable members (those not individually subject to CT tax) if they meet one or more of the following categories:
- They are incorporated in, or formed under the laws of, the United States, any state, the District of Columbia, or a U.S. territory or possession, excluding members that have at least 80% of their property and payroll during the income year located outside such jurisdictions;
- 20% or more of their property and payroll during the income year is located in the United States, any state, the District of Columbia, or a U.S. territory or possession; or
- They are incorporated in a jurisdiction determined to be a tax haven, unless the DRS Commissioner is satisfied that the member is incorporated there for a legitimate business purpose. A tax haven is a jurisdiction that (1) has laws or practices preventing the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the tax regime; (2) has a tax regime that lacks transparency; (3) facilitates the establishment of foreign-owned entities without the need for a local substantive presence or prohibits these entities from having any commercial impact on the local economy; (4) explicitly or implicitly excludes the jurisdiction's resident taxpayers from taking advantage of the tax regime benefits or prohibits enterprises benefiting from it from operating in the jurisdiction's domestic market; or (5) has created a tax regime favorable for tax avoidance, based on an overall assessment of relevant factors, including whether the jurisdiction has a significant untaxed offshore financial or services sector relative to its overall economy.
The DRS Commissioner must publish a list of jurisdictions he considers to be tax havens by September 30, 2015, and the list is retroactive to January 1, 2015 and remains in effect until the Commissioner publishes a new list.
The bill allows a deduction for groups that are publicly traded companies to offset the increase in any member's "net deferred tax liability" or decrease in its "net deferred tax assets" resulting from the new unitary reporting requirements. This deduction will be allowed to be claimed over a 7-year period beginning in the 2018 income tax year, with 1/7 of the deduction claimed each year through 2024.
One of the taxable members of the group must be designated the Connecticut taxable member that must file and pay the unitary tax on behalf of the entire group. All members of the group are jointly and severally liable for all tax, interest and penalties of any other member of the group. The designated taxable member is responsible for filing all estimated tax installments for the group. The bill extends the due dates for estimated payments for any groups whose tax year begins in January, February or March to June 15, 2015; July 15, 2015 and August 15, 2015; respectively. These groups must have 70% of the estimated tax for the year paid in by those dates.
Corporate Income Tax Surcharge Extended
The 20% corporation income tax surcharge is extended for two additional years to the 2016 and 2017 income years. In addition, a temporary 10% surcharge is imposed for the 2018 income year. Companies that have less than $100 million in annual gross income in those years are exempt from the surcharge, unless they file combined or unitary returns.
Net Operating Loss Carryforward Limitation
Beginning with the 2015 income year, the amount of net operating loss (NOL) that a corporation may carry forward is limited to the lesser of: (1) 50% of net income, or for companies with taxable income in other states, 50% of the net income apportioned to Connecticut; or (2) the excess of NOL over the NOL being carried forward from prior income years.
Tax Credit Limitation
For any income year commencing on or after January 1, 2015, the amount of tax credits that corporations may use to reduce their corporation tax liability is limited to 50.01% (currently 70%) of the amount of tax due in any income year prior to the application of credits.
Personal Income Tax Changes (all changes applicable to January 1, 2015 unless otherwise noted)
- Increases the marginal rate on high income taxpayers from 6.7% to 6.9% and adds a seventh tax bracket subject to 6.99%
- For single and married filing separate, 6.9% bracket applies to taxable income over $250,000 but less than $500,000; the 6.99% bracket applies to income over $500,000.
- For head of household, 6.9% bracket applies to taxable income over $400,000 but less than $800,000; the 6.99% bracket applies to income over $800,000.
- For married couples, 6.9% bracket applies to taxable income over $500,000 but less than $1,000,000; the 6.99% bracket applies to income over $1,000,000.
Sales and Use Tax
Effective July 1, 2015, the luxury sales tax rate increases from 7% to 7.75% for motor vehicles, jewelry, clothing and footwear costing more than specified amounts defined as follows:
- $50,000 for motor vehicles, with certain exceptions;
- $5,000 for jewelry (real or imitation); and
- $1,000 for clothing, footwear, handbags, luggage, umbrellas, wallets, and watches.
The tax rate for computer and data processing services increases from 1% to 2% on October 1, 2015 and to 3% on October 1, 2016.
Computer and data processing services includes certain electronically transmitted software purchases presently, and the bill expands this definition to include the creation, development, hosting, and maintenance of an Internet website.
Effective July 1, 2015, the 1.5% heavy equipment rental surcharge is expanded to apply to all equipment owned by a rental company and rentals of 364 days or less. "Rental Company" does not include a business entity with annual rental income, excluding retail or wholesale sales of rental equipment, that is less than 51% of the total revenue of the business in a given tax year.
Estate and Gift Tax Cap
A $20 million cap is placed on the maximum amount of:
- Estate tax imposed on the estates of residents and nonresidents who die on or after January 1, 2016; and
- Gift tax imposed on taxable gifts made on or after January 1, 2015.
Should you have any questions related to this article or how these tax laws may impact you, contact your Marcum State and Local Tax Advisor.
|A special thanks to article contributor Paul Graney, Director, Tax & Business Services.|