An Update On The New CT Pass Through Entity TaxPosted on September 26th, 2018
Here is the latest update we have on the new CT PET Tax that we have been sending our clients so many communications about:
- IRS has issued no guidance indicating whether the CT PET payments will be recognized as a deductible business expense for Federal tax purposes.
- We should plan on not taking a Federal tax deduction for the amount of CT Pass Through Entity Tax, at this point in time. Though there is still a chance we will get the tax benefit, we aren’t ready to reduce our Federal quarterly estimated tax calculations for clients just yet.
- CT’s online payment system is now available. Here is a link to instructions on how to use it:
- You can also use the CT PET tax payment vouchers at the link below, to make your estimated tax payments by check:
- What Amount To Pay? The tax is 6.99% of your total year to date profits. If this is your first estimated tax payment for the year, you’d want to make this a 9-month catch-up payment equal to 6.99% of your Jan-Aug 2018 profits. If you’ve already made CT estimated tax payments in April and June for 2018, you would take 6.99% of your last 3 months’ profit, and remit that amount.
- Jan 15, 2019 Estimates. If you want to keep the door open, in case the IRS later allows the Federal deduction, then you’d want to make your Q4 estimated tax payment before Dec 31. Otherwise the deduction would fall into the following tax year.
Re-Characterizing April 15 and June 15 Payments Already Made:
- CT will allow you to re-characterize all or a portion of your 2018 personal CT estimated tax payments, including those you have already made, to move those dollars over to your business EIN. You will have until December 31 to do that, and CT will issue a new form by September 30, 2018, which will need to be prepared, signed, and mailed to CT Dept of Revenue Services before December 31 in order to have them process your recharacterization.
- If you carried forward a 2017 CT refund and applied that towards your 2018CT taxes, you’ll be able to recharacterize those amounts as well.
- This all needs to be done at the individual level, so for an entity with 4 partners, each of the 4 individual partners would need to submit a form on their own.
Penalty and Interest Waivers:
- CT recognizes that passing the new law this late in the year, retroactive to Jan 1, 2018, will cause all taxpayers to immediately be late on paying the 1st and 2nd quarter CT PET tax. For some reason, they decided NOT to give an automatic penalty waiver on this, so in the event you receive an underpayment penalty notice in 2019, you will be able to submit a written explanation as to why you were late in making the required PET payments, and as long as your reply is submitted by December 31, 2019, they will grant a penalty waiver. Our office will generate a template letter for this.
- It is very important for you to understand that late payments of the CT PET tax will be subject to interest and penalties. While CT touts this new tax as “revenue neutral” to taxpayers, they do stand to collect a lot of interest and penalties from pass through business owners who are not able to pay their quarterly taxes on time.
Federal Estimated Tax Payments:
- Please continue to pay the full amount of your quarterly Federal estimated tax payments, excluding any impact from the CT PET deduction. We’ll continue the waiting (hoping) game for IRS guidance that will tell us one way or another as to whether there will be a Federal deduction for the CT PET tax, but we aren’t going to hold our breath in the meantime. We’ll take the conservative expectation that there will be no Federal deduction.
- If we discover later that the CT PET tax payments will be deductible at the Federal level, we can always just adjust your Q4 Federal estimated tax payment, or simply claim a refund of the overpayment when we file the tax return in tax season.