A Tax Notes State article, linked by permission
Shortly following the adoption of the federal Tax Cuts and Jobs Act of 2017, Connecticut adopted its passthrough entity (PTE) tax (also known as PET). Connecticut was the first state in the country to adopt a PET, which was effective with the 2018 tax year. The purpose of the PET was to provide the owners of certain passthrough entities, such as limited liability companies, partnerships, and S corporations (referred to herein as PTEs), with a way to mitigate the negative tax consequences of the $10,000 limitation imposed by the TCJA on the deduction of certain state and local taxes (the SALT limitation). Connecticut was the first state in the country to impose an income-based tax directly on PTEs that was designed to provide a workaround to the SALT limitation.
In brief, the main objective of the 2018 Connecticut PET legislation was to provide the owners of the PTE with the economic effect of a federal income tax deduction resulting from the movement of the tax burden for state and local income taxes from the owners of the PTE to the PTE, in which case such income taxes would be deductible by the PTE. Without the 2018 Connecticut PET legislation, the state tax burden on the income earned by the PTE would be on the individual owners of the PTE, and the state income tax would generally not be fully deductible for federal tax purposes because of the SALT limitation.
Read the full article written by Louis B. Schatz, and published in Tax Notes State, as he provides detailed analysis of significant upcoming legislative revisions to Connecticut's passthrough entity tax.
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