Early this summer, the state lived up to its shrewd reputation when its General Assembly passed a budget bill containing provisions that would (among other provisions) increase tax revenue from multistate corporations that operate their businesses through separate entities.
On June 4, 2015, the Connecticut General Assembly passed House budget bill H.B 7061 (The New Law). The New Law includes tax changes that would affect corporate income tax, personal income, and sales and use taxes. A quick review of the law reveals a tried and true approach aimed at increasing the State’s corporate income tax revenue from multistate corporate taxpayers that operate their business through separate corporate entities. In addition, the law may have ramifications on Connecticut personal as well as sales taxpayers.
Corporate Tax Provisions
Adopting Mandatory Combined Reporting
Effectively for tax year beginning on or after January 1, 2016, members of a group of companies that have common ownership, are engaged in a unitary business and have at least one company is subject to corporation income tax must file combined reporting. The taxpayer will be deemed to meet the definition of “common ownership” if :
“more than 50% of the voting control of each member of a combined group is directly and indirectly owned by a common owner or owners either corporate or noncorporate, whether or not the owners are members of the combined group.”
“Unitary business” will apply to a group of companies if the companies operates as “a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership, which enterprise is sufficiently interdependent, integrated or interrelated through its activities so as to provide mutual benefit and produce a significant sharing or exchange of value among such entities, or a significant flow of value among the separate parts.”
A combined group may make an election to have the combined group filed on world-wide basis or affiliated group basis.
Extending Corporate Income Tax Surcharge
The temporary 20% corporation income tax surcharge is extended for two years (through 2017). The surcharge will be reduced to 10% beginning on or after January 1, 2018.
Net Operating Loss Limitation
Beginning on or after January 1, 2015, the amount of net operating loss corporations may carry forward is limited to the lesser of
50% of current year net apportioned income, or
the excess of net operating loss over the NOL being carried forward from the prior year.
Tax Credit Limitation
Beginning on or after January 1, 2015, the amount of tax credit is reduced from 70% to 50.01%.
Personal Income Tax – Rate Changes
Beginning on or after January 1, 2015, the marginal tax rate is increased to 6.9% from 6.7%. For taxpayers whose income is more than $500,000 for single or $1M for married couples, the taxable income is subject to 6.99%
Trust and Estate Tax – Rate Changes
The trust and estate income tax rate is increased to 6.99% from 6.7%.
Sales and Use Tax
Effective July 1, 2015, the luxury goods tax rate is increased from 7 percent to 7.75 percent. Luxury goods include cars, jewelry, clothing or footwear costing more than certain amounts.