On June 19th and August 21st, the Connecticut Department of Revenue Services (CDRS) issued guidance regarding the state’s Pass-Through Entity Tax (PE Tax), applicable to tax years beginning on or after January 1, 2018. Together, the August and June documents discuss the alternative tax bases, the combined return election, estimated payments, and mechanics around the tax credit. Questions remain for law firms and their partners.
PwC expects that Connecticut nonresident partners working and filing a US Form 1040 income tax return (i.e., a partner who is not a “non-resident” for US federal income tax purposes) will need to report, file and pay CT income tax through an individual income tax return instead of a composite return, which was the case prior to the enactment of S.B. 11.
In discussions with the CDRS, PwC has received confirmation that for 2018 there will be no composite filing alternative. While this may be something that the state addresses in a subsequent year, we have been informed it is not on the agenda for discussion this year. Thus, law firms may not elect to pay an entity level tax on the CT-allocable portion of GPs, thereby relieving individual non-resident partners from having to file Form CT-1040NR/PY.
While non-Connecticut resident partners receiving GPs from a PE will now be required to file separately as a nonresident in CT and report their GP beginning in 2018, PwC would expect this does not apply to a law firm’s partners who are neither US citizens, residents nor green card holders (i.e., partners who file Form 1040NR for US federal income tax purposes). PwC has always taken the position that since the Connecticut statute for taxation of individuals begins with federal Adjusted Gross Income (“AGI”), GPs made to non-US resident partners are not subject to tax to the extent services are performed outside the US, since such GPs are excludable from tax under IRC § 862(a)(3).
Tax Partner, PwC US
Gary M. Pogharian
Partner, PwC US
Partner, Law Firm Services Tax Leader, PwC US
Tax Managing Director, PwC US
Tax Director, PwC US
Director, PwC US