CT Pass-Through Entity Tax: What It Means for Businesses and Owners

Connecticut’s Pass-Through Entity Tax (PET) represents a significant change in how certain business entities are taxed within the state. Introduced in response to federal tax changes, this tax applies to partnerships, S corporations, and other pass-through entities by imposing a state-level entity tax.

Entities Subject to the Tax

The Connecticut PET applies to partnerships and S corporations, including LLCs classified as such for federal tax purposes. These entities pass income, deductions, and credits directly to their owners, bypassing corporate income tax. The PET was introduced as a workaround to the federal cap on state and local tax (SALT) deductions. Sole proprietorships and C corporations are not included, making it essential for businesses to understand these distinctions for tax planning and compliance.

Election Steps

To opt into the Connecticut PET, entities must confirm their federal classification as a partnership or S corporation. The election is made by filing Form CT-1065/CT-1120SI, which doubles as the annual tax return. This election must be submitted annually by the fifteenth day of the third month following the entity’s taxable year-end. Timely filing is critical to avoid penalties and secure potential tax benefits.

Calculating Liability

PET liability is based on the entity’s Connecticut-sourced income, with a tax rate of 6.99%. Entities should account for available tax credits and deductions, such as the Research and Development Tax Credit, to reduce their liability. Quarterly estimated payments are required if the annual PET liability exceeds $1,000, with penalties applying for underpayment.

Filing Obligations

Entities must file Form CT-1065/CT-1120SI by the fifteenth day of the third month after the taxable year ends. This form requires detailed financial information, including Connecticut-sourced income and applicable deductions or credits. Accurate record-keeping and regular financial reviews are essential for compliance.

Payment Timeline

Quarterly estimated payments are required if the annual PET liability exceeds $1,000. These payments are due on April 15, June 15, September 15, and January 15, with each installment representing 25% of the estimated annual liability. Businesses can use the “safe harbor” provision, basing payments on 100% of the prior year’s liability, to avoid penalties. Electronic payment options are available through Connecticut’s Department of Revenue Services Taxpayer Service Center.

Implications for Owners

The PET provides individual owners with a way to bypass the federal $10,000 SALT deduction cap. As a deductible business expense, the PET reduces the entity’s taxable income. Owners also receive a credit on their Connecticut personal income tax returns for their share of the PET paid by the entity, preventing double taxation. Tax advisors can help owners integrate these credits into their broader tax strategies.

Amended Returns

Entities must file amended returns if there are changes to income, deductions, or credits after the original filing. Amended Form CT-1065/CT-1120SI must be submitted within three years of the original filing date. If changes result from an IRS audit, Connecticut requires reporting within 90 days. Owners may also need to amend their personal tax returns to reflect adjustments in their share of income. Coordination between entities and owners is critical for consistent and accurate filings.