As my readers know, I’ve been anticipating strong state responses to some of the more onerous aspects of the Tax Cuts and Jobs Act (TCJA). Well, Connecticut Governor Dannel Malloys “An Act Concerning Connecticut’s Response to Federal Tax Reform” (The Act) is a major shot in what I expect will be a long war. One key provision of the Act is the Pass-Through Entity Tax (PET).
PET is designed to be revenue neutral to both the State and taxpayers. The TCJA limited the deductibility of state and local taxes paid by individuals to $10,000 and pass through entities (PTE) with Connecticut source income are now required to pay a tax on that income at a rate of 6.99% -- the highest individual tax rate. Malloy is trying to work around this. Under the Act, members of the PTE will receive a credit on their Connecticut personal income tax return equal to their pro-rata share of entity income multiplied by 93.01%.
Here’s how it works:
I’m not going out on a limb by saying that the federal government may have something to say out this approach. States will continue to look for ways to work around elements of the TCJA and I will be watching to see where the battle lines will be drawn. It looks to be a long, hot summer. If you have questions, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, CPA, J.D., LL.M., a tax partner and head of the State and Local Tax Group at Berdon LLP, New York Accountants, advises clients on the unique requirements of governments and municipalities across the nation.