Corporate Close-Up: Connecticut Joins Mandatory Combined Reporting Trend


For larger corporate entities that own or operate affiliate or subsidiary corporations, whether or not they must file a tax return including the tax information for these related companies is a central concern. As reported by Martha Kessler for the Bloomberg BNA Daily Tax Report, on June 30 Connecticut passed Public Act 15-244, the budget bill for the biennium ending June 30, 2017. Provisions in the bill include mandatory combined reporting for tax years beginning on or after Jan. 1, 2016.

Twenty-three of the 45 states that impose a corporate income tax required corporate parents to file a combined return that includes their subsidiaries’ tax information, according to the Bloomberg BNA 2015 Survey of State Tax Departments, Connecticut now adds another state to that group. Central questions involving combined reporting are whether the state uses the unitary business or ownership threshold to determine which entities are included in a combined group and whether the state uses water’s edge or worldwide reporting as their default method.

Connecticut’s new combined reporting standards will be based on the “unitary business” definition, but also will have an ownership threshold. Companies that have common ownership and are engaged in a unitary business where at least one member is subject to Connecticut corporate income tax must file a combined return. Common ownership means “that more than fifty per cent of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners.” Under combined reporting, a unitary business “means 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.”

Connecticut has elected to make water’s edge the default method for reporting while allowing elections for reporting on a world-wide basis or an affiliated group basis. Under the default water’s edge method, the combined group includes corporations that:

  • are incorporated in or formed under the laws of the U.S. unless eighty per cent of both their property and payroll are located outside the U.S. (and any territories or possessions);
  • are incorporated or formed anywhere if twenty percent or more of their payroll and property are located in the U.S.;
  • earn more than twenty percent of their gross income, directly or indirectly, from intangible property or service-related activities, the costs of which generally are deductible for federal income tax purposes; or
  • are incorporated in a deemed “tax haven” unless it can be proven the corporation has incorporated in that jurisdiction for a legitimate business purpose.

Connecticut is the latest state to join the trend toward combined reporting, and have laid out clear standards for which corporations must be included in the combined report. The impact of the new reporting regime remains to be seen.

The text of Connecticut Public Act 15-244 can be found here

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should more states move to mandatory combined reporting?
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