Sweeping Connecticut Tax Reforms Passed by the General Assembly June 5, 2015

Transcription

1 Multistate Tax EXTERNAL ALERT Sweeping Cnnecticut Tax Refrms Passed by the General Assembly June 5, 2015 Overview On June 3, 2015, the Cnnecticut General Assembly passed in cncurrence Huse Bill 7061 ( HB 7061 ), 1 the Cnnecticut state budget bill fr the biennium spanning July 1, 2015 thrugh June 30, The bill is currently pending the signature f Gvernr Dannel Mally. If enacted, this legislatin wuld make several changes t Cnnecticut tax law. In this Tax Alert we summarize these pending law changes, which wuld have varius effective dates as specified belw. Changes t the Cnnecticut Crpratin Business Tax HB 7061 wuld make the fllwing changes t the crpratin business tax: Extend the 20% surtax n bth the 7.5% tax rate n the incme base and the 0.31% tax rate n the capital base fr incme years beginning prir t January 1, The surtax wuld be reduced t 10% fr incme years after January 1, The 10% surtax n the capital base wuld be applicable nly t calendar year taxpayers fr the incme year beginning n January 1, 2018, and wuld nt apply t fiscal year taxpayers r t any tax perid after January 1, We anticipate that this is a drafting errr that wuld ptentially be addressed as part f a technical crrectins bill. The surtax wuld apply t all cmpanies with grss incme f $100,000,000 r mre, all cmpanies filing cmbined r elective unitary returns prir t 2015, and all cmpanies filing unitary returns in 2015 thrugh Extend the current film prductin tax credit limitatins thrugh June 30, Limit the deductin f Net Operating Lsses ( NOLs ) t 50% f Cnnecticut incme effective January 1, Limit the applicatin f tax credits t 50.01% f the amunt f tax due effective January 1, Impse mandatry unitary taxatin effective January 1, 2015: The Cnnecticut cmbined grup (referred t in this Tax Alert as the CT unitary grup ) wuld be cmpsed f all entities with cmmn wnership (mre than 50%, direct r indirect) that are engaged in a unitary business. CT unitary grup members with nexus in Cnnecticut wuld be taxable members. CT unitary grup members withut nexus in Cnnecticut wuld be nntaxable members. The designated taxable member wuld be either the parent f the CT unitary grup r, if the parent f the CT unitary grup is nt a taxable member, the taxable member as selected by the CT unitary grup. The CT unitary grup s incme wuld be the aggregate incme f every taxable and nntaxable member f the CT unitary grup as reprted n a federal return as if each member was filing a separate federal return r an adjusted prfit and lss statement f a unitary freign cmpany that des nt file a federal return. The CT unitary grup s incme wuld include its distributive share frm a pass thrugh entity. All inter-grup dividends wuld be eliminated. Inter-cmpany gains wuld be deferred in a manner cnsistent with Treas. Reg Charitable cntributins wuld be first deducted frm the CT unitary grup s incme subject t IRC 170 limitatins. 1 H.B. 7061, 2015 Gen. Assemb., Reg. Sess. (Cnn. 2015). Page 1

2 Gains r lsses under IRC 1231(a)(3) wuld be cmbined at the CT unitary grup level and then apprtined t each member. Expenses related t incme that Cnnecticut is prhibited frm taxing under the U.S. Cnstitutin wuld nt be allwed as a deductin. Each taxable member wuld determine its separate apprtinment percentage based n the therwise applicable apprtinment frmula under Cnnecticut law. Taxable members wuld use the CT unitary grup s denminatr. Surcing rules wuld depend n the apprtinment frmula applicable t the separate taxable r nntaxable entity. Receipts surced t Cnnecticut fr nntaxable members wuld be allcated t the numeratrs f the taxable members. Transactins between members wuld be eliminated fr apprtinment purpses. Every taxable member wuld have the right t apprtin if any member is taxable utside Cnnecticut (Finnigan rule). CT unitary grup NOL carryfrwards frm 2015 and frward wuld be shared with ther taxable members f the CT unitary grup, if such ther members were members during the year the NOL was generated. Cmbined grup NOL carryfrwards frm years prir t 2015 wuld be shared with ther members f the CT unitary grup that were included in the same pre-2015 cmbined grup. NOLs frm years prir t 2015 that were earned by a separate cmpany wuld be available t that separate cmpany n a Separate Return Limitatin Year basis. The CT unitary grup s capital base tax wuld be the aggregate capital bases f all taxable and nn-taxable members. Intercrprate stckhldings wuld be eliminated. Financial services cmpanies wuld be subject t the capital base tax at the $250 minimum amunt, wuld nt be included in the CT unitary grup s capital base calculatin, and wuld nt be included when calculating the capital base apprtinment. The capital base apprtinment denminatr wuld be the aggregate denminatr fr all CT unitary grup members. The aggregate capital base cap wuld be $1M n the CT unitary grup. If the CT unitary grup s tax exceeds $1M, then each member wuld pr-rate its separate capital base tax. The CT unitary grup wuld cmpare its incme tax liability n an aggregate basis t its capital base tax n an aggregate basis and pay the higher f the tw. The tax credit rdering rules and tax credit limitatin rules wuld apply separately t each taxable member. Tax credits earned n r after 2015 wuld be shared with ther members f the CT unitary grup, if such ther members were members during the year the tax credit was earned. Tax credits carried frward frm prir t 2015 wuld be shared with ther entities that were included in the same pre-2015 cmbined return. The default CT unitary grup wuld use a water s-edge basis. Optinal electins wuld be available fr filing n a federal affiliated grup basis r a wrldwide unitary basis. The affiliated electin and wrldwide unitary electin wuld nly be available if made n an riginally filed return and wuld then be effective fr the next 10 years. The water s-edge CT unitary grup wuld (a) exclude U.S.-incrprated cmpanies, (b) include freign incrprated cmpanies with 20% r mre f prperty and payrll in the U.S., and (c) include any cmpanies incrprated in a tax haven at the discretin f the Cmmissiner, Department f Revenue Services ( Cmmissiner ). Publicly traded cmpanies in the CT unitary grup wuld be entitled t the fllwing deductin as stated in the pending statute: Fr the seven-year perid beginning with the unitary grup s first incme year that begins in 2018, a unitary grup shall be entitled t a deductin frm unitary grup net incme equal t ne-seventh f the amunt necessary t ffset the increase in the net deferred tax liability r decrease in the net deferred tax asset, r the aggregate change theref if the net incme f the unitary grup changes frm a net deferred tax asset t a net deferred tax liability, as cmputed in accrdance with generally accepted accunting principles, that wuld result frm the Page 2

3 impsitin f the unitary reprting requirements under... this act, but fr the deductin prvided under this sectin. 2 The frmer cmbined return rules wuld be inapplicable t years n and after The first 2015 estimate fr a CT unitary grup with an incme year beginning in 2015 wuld be due at the time f the 2 nd installment. Fr a CT unitary grup with its incme years beginning in January r February 2015, the 2 nd installment wuld be due n July 15, Fr a CT unitary grup with its incme years beginning in March 2015, the 2nd installment wuld be due n August 15, The 2 nd installment wuld be required t equal 70% f the required annual payment. A safe harbr wuld be created in 2015 if the CT unitary grup s estimates equal 100% f the tax shwn n the taxable member s aggregate separate returns r cmbined return filed in the previus year, withut regard t tax credits under Cnn. Gen. Stat. Title 12, Ch. 208 (Crprate Business Tax). Require the Cmmissiner t review the impact f alternative methds f apprtinment and prvide recmmendatins in a reprt delivered t the Finance, Revenue, and Bnding Cmmittee f the General Assembly n r befre February 1, Changes t the Cnnecticut Persnal Incme Tax HB 7061 wuld make the fllwing changes t the persnal incme tax: Exempt U.S. military retirement incme frm the Cnnecticut incme tax effective fr incme years beginning n and after January 1, Increase the tp tw marginal rates t 6.9% and 6.99% effective January 1, The 6.9% rate wuld apply t Cnnecticut taxable incme ver: $250,000, if filing Single r Married Filing Separately $400,000, if filing Head f Husehld $500,000, if filing Married Filing Jintly The tp 6.99% marginal rate wuld apply t Cnnecticut taxable incme ver: $500,000, if filing Single r Married Filing Separately $800,000, if filing Head f Husehld $1,000,000, if filing Married Filing Jintly The new 6.99% rate wuld als apply t all trusts and estates. Delay by ne year a scheduled $500 increase in the persnal exemptin. The persnal exemptin fr the incme year beginning n January 1, 2016, wuld be $14,500 and then wuld increase t $15,000 fr incme years beginning n r after January 1, Delay by ne year a scheduled increase in the threshld fr the credit fr adjusted grss incme. The varius increases in the Cnnecticut grss incme threshlds that were t ccur fr the incme year beginning n January 1, 2015, wuld ccur fr the incme year beginning n January 1, Delay the increase f the earned incme tax percentage t 30%. The percentage wuld remain at 27.5% fr the 2015 and 2016 incme years. Decrease the amunt f the 2016 credit fr taxes paid n a primary residence r mtr vehicle frm $300 t $200 and reduce the incme levels fr the phase-ut f the credit. Changes t the Cnnecticut Sales and Use Tax HB 7061 wuld make the fllwing changes t the sales and use tax: Limit the sales tax hliday in the 3 rd week f August t clthing and ftwear under $100 (previusly $300) effective July 1, Raise the luxury sales and use tax rate frm 7% t 7.75% n (a) mtr vehicles ver $50,000, (b) jewelry ver $5,000, and (c) clthing and ftwear ver $1,000 effective July 1, Increase the sales and use tax rate n cmputer and data prcessing services frm 1% t 2% effective Octber 1, 2015, and then t 3% effective July 1, Create an exemptin frm sales and use tax fr sales f cmputer and data prcessing services between affiliates effective Octber 1, Extend the definitin f cmputer and data prcessing t include services rendered in cnnectin with the creatin, develpment, hsting, and maintenance f an Internet web site effective July 1, H.B. 7061, 141(d), 2015 Gen. Assemb., Reg. Sess. (Cnn. 2015). Page 3

4 Expand the sales tax t parking services sld by certain gvernment r tax exempt entities as well as sme parking services sld by an emplyer t its emplyees effective July 1, Extend the sales and use tax t car wash services ther than cin perated car washes effective July 1, Eliminate the use tax exemptin, but nt the sales tax exemptin, fr sales f Internet access services effective Octber 1, If enacted, this wuld appear t raise cnstitutinal issues and is presumed t be a drafting errr. Clarify that the nursing hme exemptin des nt include taxable sales f parking effective July 1, Changes t the Cnnecticut Insurance Premium Tax HB 7061 wuld make the fllwing changes t the insurance premium tax: Extend the current limitatin fr tax credits thrugh Tax credits are limited t 30%, 55%, r 70% f the amunt f tax due depending n the type f tax credit. Rename the insurance reinvestment fund tax credit as the Invest CT Fund tax credit and expand the tax credit t apply t investments in cybersecurity businesses and businesses lcated in municipalities with a ppulatin greater than 80,000. The aggregate amunt f tax credits available wuld be increased t $350M. These changes wuld be effective July 15, Changes t the Cnnecticut Hspital Grss Receipts Tax HB 7061 wuld make the fllwing changes t the hspital grss receipts tax: Limit the applicatin f tax credits t 50.01% f the amunt f tax due fr quarters n r after July 1, Apply a grss receipts tax t ambulatry surgical centers effective Octber 1, Changes t the Cnnecticut Estate and Gift Tax HB 7061 wuld make the fllwing changes t the estate and gift tax: Limit the amunt f Cnnecticut estate tax fr bth residents and nnresidents t $20M after allwing fr a credit fr Cnnecticut gift taxes paid by the decedent r the decedent s spuse fr deaths ccurring n r after January 1, Limit the aggregate amunt f gift tax t $20M fr all years after January 1, Changes t the Cnnecticut Cigarette Tax HB 7061 wuld make the fllwing changes t the cigarette tax: Increase the cigarette tax t mills per cigarette effective Octber 1, Increase the cigarette tax t 195 mills per cigarette effective July 1, Impse a cigarette excise flr tax at 12.5 mills per cigarette n distributrs and dealers n September 30, 2015 at 11:59 and then again n June 30, 2016 at 11:59. Changes t the Cnnecticut Admissin Tax: HB 7061 wuld exempt frm tax admissin charges t athletic events presented by a member f the Atlantic Prfessinal Baseball League at Harbr Yard in Bridgeprt frm July 1, 2015 t June 30, ASC 740 If the incme tax law changes discussed in this Tax Alert are enacted in June, 2015, any impact f these law changes wuld be treated as a secnd quarter event fr financial statement purpses fr calendar year taxpayers. Cnsideratins If HB 7061 is enacted, Taxpayers subject t the Cnnecticut crpratin business tax may need t cnsider these ptentially significant changes t their Cnnecticut tax. CT unitary grups may need t adjust their secnd quarter estimates that culd be due as sn as July 15, 2015, t take these changes int accunt. The increase in the highest marginal persnal incme tax rate wuld als apply fr purpses f the Cnnecticut cmpsite tax n passthrugh entities. In additin, emplyers may be required t adjust the persnal incme tax withheld frm highincme emplyees. Bth sellers and purchasers f cmputer and data prcessing services may need t accunt fr the expanded definitin f the taxable services and the phased-in increase in the tax rate. Page 4

5 Cntacts If yu have questins regarding pending HB 7061 r pertaining t ther Cnnecticut tax matters, please cntact any f the fllwing Delitte Tax prfessinals. Jack Lutz Directr Delitte Tax LLP, Hartfrd jacklutz@delitte.cm (860) Kim Sweeney Directr Delitte Tax LLP, Stamfrd ksweeney@delitte.cm (203) Craig Arnsn Directr Delitte Tax LLP, Hartfrd rarnsn@delitte.cm (860) Al Mercier Directr Delitte Tax LLP, Hartfrd amercier@delitte.cm (860) Brian Pwers Manager Delitte Tax LLP, Hartfrd brpwers@delitte.cm (860) This alert cntains general infrmatin nly and Delitte is nt, by means f this alert, rendering accunting, business, financial, investment, legal, tax, r ther prfessinal advice r services. This alert is nt a substitute fr such prfessinal advice r services, nr shuld it be used as a basis fr any decisin r actin that may affect yur business. Befre making any decisin r taking any actin that may affect yur business, yu shuld cnsult a qualified prfessinal advisr. Delitte shall nt be respnsible fr any lss sustained by any persn wh relies n this alert. Abut Delitte Delitte refers t ne r mre f Delitte Tuche Thmatsu Limited, a UK private cmpany limited by guarantee ( DTTL ), its netwrk f member firms, and their related entities. DTTL and each f which is a legally separate and independent entity. DTTL (als referred t as Delitte Glbal ) des nt prvide services t clients. Please see fr a detailed descriptin f DTTL and its member firms. Please see fr a detailed descriptin f the legal structure f Delitte LLP and its subsidiaries. Certain services may nt be available t attest clients under the rules and regulatins f public accunting. Cpyright 2015 Delitte Develpment LLC. All rights reserved. Member f Delitte Tuche Thmatsu Limited Page 5