While many states are busy focusing on conformity issues in the wake of federal tax reform, others are responding by shaking up other parts of their tax regimes. Given the dominance of pass-through entities as the primary vehicle for business enterprise in the country, it’s not surprising that Connecticut and New York have become the latest states to propose new entity level taxes on these business entities.
In Connecticut, S.B. 11 is awaiting signature by Gov. Dannel Malloy (D), having been certified by the Secretary of State on May 18. If the bill becomes law, it will apply retroactively to taxable years beginning on or after Jan. 1, 2018. Under the bill, Connecticut will impose a new tax on “affected business entities,” which include any entity treated as an S corporation or partnership for federal tax purposes, but not publicly traded partnerships that file a return with Connecticut under Conn. Gen. Stat. § 12-726. The tax will be 6.99 percent of the separately and non-separately computed items of income of the partnership or S corporation, as modified by the provisions under Conn. Gen. Stat. § 12-701 for Connecticut-sourced items of income, gain, loss, or deduction.
Affected entities also will be able to elect to use an alternative calculation, under which affected entities multiply the sum of the resident portion of unsourced income and modified Connecticut source income by 6.99 percent. The bill also provides guidance for owners claiming a credit for tax paid by the affected entity, and for entities filing as part of a combined group.
In New York, there has been talk of a potential bill that would enact a state-wide unincorporated business tax, similar to the tax already imposed in New York City. The tax would apply to “affected partnerships” only, as New York already treats S corporations as C corporations for income tax purposes.
Under the proposed tax, an affected partnership would be liable for an entity level tax of 5 percent on unincorporated business taxable income. Unincorporated business taxable income of an affected partnership would include the partnership’s own unincorporated business net income as allocated to New York, plus any income of the partnership attributable to income of lower-tier partnerships allocable to New York. Unincorporated business net income would then be allocated to New York using an evenly-weighted three factor allocation percentage of property, payroll, and sales. The proposal also provides guidance on credits for lower-tier partnerships and other owners, estimated tax payments, and filing requirements.
While both taxes would not apply to taxable years beginning before 2018, taxpayers should keep a watchful eye on the progress of the bills. S.B. 11 has been assigned a public act number by the state of Connecticut, and Malloy is expected to sign the bill into law imminently. Meanwhile, New York is seeking public comment by July 16, 2018, on the proposed Unincorporated Business Tax.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Which other states may consider imposing an entity level tax on pass-through entities to generate revenue?
For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.
Tune in for Bloomberg’s tax reform webinar on Wednesday, May 30, 2018, from 2 pm to 3 pm. “Federal Tax Reform: State Impact and Responses” will give you a snapshot of state responses to federal tax reform and let you know what to expect during the remainder of the year. Register for this webinar here.
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