December 4, 2023

Connecticut’s Pass-Through Entity Tax to be Optional for 2024

By Joseph Feehan, Partner, Tax & Business Services

Connecticut’s Pass-Through Entity Tax to be Optional for 2024 State & Local Tax

Taxpayers preparing for 2024 should be reminded of some significant changes in Connecticut, including changes to the pass-through entity tax (“PTET”). For 2024, the PTET is optional, and there are changes to the tax base calculation. Connecticut also eliminates elective composite tax remittance and reinstates mandatory composite tax returns for certain taxpayers.

Elective PTET

For tax years beginning on or after January 1, 2024, the PTET is now optional and made through an election. Pass-through entities (“PTE”) must submit written notice of such election to the commissioner for each tax year they make the election, no later than the due date for filing the return or the extended due date if given an extension. Connecticut has not provided any guidance on whether the written election is made with the return, with estimated payments, submitted via myconneCT, or if a form will be provided. We recommend that taxpayers anticipating making a PTET election remit estimated payments as if a PTET election were in effect.

PTET Credit and Combined Filing

For individuals, the current personal income tax credit of 87.5% of the pro rata share of tax paid by the PTE is maintained and is still refundable. The corporation tax credit for PTET paid is eliminated for C Corporations that are partners in a PTE. Additionally, in 2024, PTEs will no longer be able to file a combined return with commonly owned PTE.

Filing Method

When calculating the 2024 PTET, taxpayers will no longer be able to use the standard base method and must use the alternative base method to calculate their Connecticut tax liability. When using the alternative base, the PTE is subject to tax on (1) the portion of its Connecticut-sourced income (minus any Connecticut-sourced income from subsidiary pass-throughs) that directly or indirectly flows through to members who are residents and nonresident individuals, trusts and estates; and (2) the portion of the PTE’s total income that is not sourced to any state with which it has nexus (unsourced income) that directly flows through to members who are resident individuals.

Composite Filings

For tax years beginning on or after January 1, 2018, and before January 1, 2024, Connecticut did not require nonresident owners to participate in composite returns. For 2024, PTEs must file composite returns and pay income tax on behalf of nonresident individuals, estates, trusts, partnerships, or S corporations with Connecticut source income of $1,000 or more, and the entity is the only source of Connecticut income.

This removes the requirement for nonresident members to file a Connecticut Nonresident Income Tax return (Form CT-1040NR/PY).

Should you require any assistance and would like to consult how these changes impact your business, please reach out to Joseph Feehan at [email protected] or a Marcum State and Local Tax professional.