by Christian Wade
Gov. Ned Lamont wants to update Connecticut’s pass-through entity tax credit, which he says will save business owners, and the state more money.
The plan, a key component of Lamont’s yet-to-be-unveiled budget proposal, calls for restoring Connecticut’s pass-through entity tax credit back to its original level of 93.01%, allowing certain business owners to claim a larger credit on personal income tax returns.
Lamont said the changes, if approved, will cut taxes for more than 120,000 small and mid-sized businesses, saving them as much as $60 million a year beginning in 2024.
“These changes we are proposing will help small businesses in Connecticut save money, which they can use to reinvest back into their establishments to support their continued growth and the development of new jobs,” he said. “By making this change, we can provide confidence to businesses that they can receive the full benefit of this tax credit.”
The federal Tax Cuts and Jobs Act of 2017 slashed the corporate tax rate from 35% to 21%, but also limited the amount of state and local taxes individuals can deduct annually to a total of $10,000.
The changes had an outsized effect on high-tax states like Connecticut, and particularly on small business owners who “pass-through” business income to personal tax returns
In response, Connecticut implemented a “workaround tax” allowing pass-through corporations, partnerships, limited liability companies, and S corporations to get around the $10,000 federal cap on deductions for state and local taxes.
Under the law, they pay a 6.99% entity tax to Connecticut on their earnings in addition to the regular 6.99% state business tax on their earnings. In exchange, business owners are allowed to claim a credit against their personal state income tax obligations — equal to 93% of the “pass-through entity” taxes they paid.
That allows business owners to get a federal tax break larger than the extra state taxes owners had to pay — a “workaround” from the federal cap on deductions.
In 2019, Connecticut lawmakers reduced the credit business owners could claim on state income taxes to 87%, which clawed back more tax revenue for the state’s coffers.
In the past two years, the state’s revenues from the pass-through entity tax have risen by 70% — from $1.15 billion to a projected $1.96 billion this fiscal year, according to the Lamont administration.
Chris DiPentima, president and CEO of the Connecticut Business and Industry Association, said restoring the pass-through entity tax credit “will have an immediate and positive impact, allowing small businesses to invest tens of millions of dollars in jobs.
“It’s one of the critical steps needed to help Connecticut’s smaller employers compete and grow their workforce,” DiPentima said.
House Republican Leader Vincent Candelora welcomed the proposal, which he said would roll back a Democratic-backed “tax hike” on the state’s business owners.
“It’s my hope that the combination of his proposal and our caucus bill to restore the pass-through entity tax credit will generate momentum within the General Assembly and get this done for taxpayers and the small business community,” he said.
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