Connecticut LLC Business Entity Tax

Connecticut LLC business entity tax is part of the Public Act 18-49 bill signed into law on May 31, 2018, by the governor.3 min read

Connecticut LLC business entity tax is part of the Public Act 18-49 bill signed into law on May 31, 2018, by the governor. The bill includes a new state income tax imposed at the entity level on pass-through entities (PTE). The imposed tax is in effect for tax years beginning on or after January 1, 2018.

PTEs subject to the tax include:

• S corporations.
• Limited liability companies (LLCs) treated as partnerships.
• Partnerships.

The act does not involve:

• Sole proprietorships.
• Publicly-traded partnerships.
• Single-member limited liability companies deemed as disregarded entities.

Overview of Pass-Through Entities Taxation

The tax rate imposed on the PTEs taxable income through the legislation is 6.99 percent. Taxable income is determined by one of two methods: Connecticut source income method or the alternative tax base method.

Connecticut Source Income Method

For federal income tax purposes, taxable income is equal to the company's new income that is derived or connected to Connecticut sources and increased or decreased by adjustment modifications currently applicable to personal income taxes.

A pass-through entity must also use the same sourcing rule that applies to those paying personal income tax. If a loss is the result of the computation, the net loss may be carried forward to upcoming taxable years until it is fully used.

Alternative Tax Base Method

A company may elect annually to use an alternative tax base instead of the Connecticut Source Income Method. A business making the alternative election must notify the Commissioner of Revenue Services with written notice no later than either the tax return's due date or extended due date.

The alternative tax base is equal to the resident portion of the company's unsourced income along with modified Connecticut source income. The resident unsourced income equates to multiplying a percentage equal to the sum of the ownership interest in the business by members who are residents of Connecticut.