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Connecticut has enacted budget legislation that extends the corporation business tax surcharge by two years, delays the phaseout of the capital base tax, and modifies the operation of the research and development (R&D) credit.1
In addition, the earned income tax credit is increased and distributions from Individual Retirement Accounts (IRAs) will be exempt from tax for certain individuals. The legislation provides special relief to restaurants, which may keep 100% of the sales tax collected during one of three specified weeks. The legislation also substantially reduces the scope of sales subject to the admissions tax. Finally, the legislation provides for a tax amnesty program beginning November 1, 2021.
Corporation Business Tax
Corporation Business Tax surcharge extended
The 10% corporation business tax surcharge, which was set to expire after the 2020 tax year, is extended by an additional two years.2
As under existing law, the surcharge applies to companies that have more than $250 in corporation tax liability and either: (i) have at least $100 million in annual gross income in those years; or (ii) are taxable members of a combined group that files a combined return, regardless of their annual gross income amount. Companies must calculate their surcharges based on their tax liability, excluding any credits.
Capital base tax phaseout delayed
The budget legislation delays a planned phaseout of the capital base tax on corporations, which would have gradually reduced the capital base tax rate from 3.1 mills in the 2020 tax year to a 0 mill rate in the 2024 tax year.3
Instead, as amended, the capital base tax rate will remain at 3.1 mills per dollar of capital base for the 2021 through 2023 tax years. The rate then decreases for the following tax years: 2024, 2.6 mills; 2025, 2.1 mills; 2026, 1.6 mills; 2027, 1.1 mills; 2028 and thereafter, 0 mills.
Interest on underpayment of estimated taxes
For tax years beginning in 2021 on or before June 22 (the date prior to enactment of the budget legislation), no interest will be imposed on the underpayment of 2021 estimated taxes to the extent that the underpayment is attributable to the extension of the 10% surtax or the delay of the capital base tax phaseout.4
The legislation increases the cap on the amount of R&D credit that a corporation may claim each year from 50.01% to 70% of its annual tax liability.5
The credit increase is phased in over two years as follows: (i) for tax years beginning in 2022, the cap is increased to 60%; and (ii) for tax years beginning in 2023 and thereafter, the cap is increased to 70%. For tax years beginning in 2021 and thereafter, the carryforward period is limited to 15 years.6
Under existing law, taxpayers are allowed to carry forward unused R&D credits for an unlimited period.
Individual income tax
For tax years beginning in 2021 and thereafter, the earned income tax credit is increased from 23% to 30.5% of the federal credit.7
This increase is predicted to provide $40 million of tax relief to the 195,000 households that are eligible for the credit.8
The legislation also phases out the income tax on certain distributions that a taxpayer with qualifying income receives from IRAs, other than Roth IRAs.9
Beginning with the 2023 tax year, the income tax on IRA distributions is phased out over a four-year period until it is fully exempt in the 2026 tax year and thereafter.10
Sales and use taxes
Sales tax retention for restaurants
Under the budget legislation, restaurants are allowed to keep 100% of the sales tax they collect on meals for one week during three specified weeks in the state’s 2022 fiscal year.11
In order to qualify for this benefit, the seller must make sales of meals and
be included in Sector 72 (Accommodation and Food Services) of the North American Industrial Classification System (NAICS). After a seller determines that it qualifies for this benefit, the seller is eligible to retain the sales tax it collects on sales of meals during one
of the following weeks: (i) August 1 to August 7, 2021; (ii) December 12 to December 18, 2021; or (iii) May 15 to May 21, 2022. Sellers must choose which of these weeks they want to retain the sales tax collected.12
If a seller decides to receive this benefit, it must provide information about the sales of meals it made during the applicable week. This information must be included on Form OS-114, Connecticut Sales and Use Tax Return
, for the period that includes the applicable week.
Expanded exemption for beer manufacturers
For sales occurring on or after July 1, 2023, the sales and use tax exemptions related to beer manufacturing are expanded to include companies that manufacture beer at a facility that also makes substantial retail sales.13
These manufacturers will qualify for the exemptions in the same manner as if the sales were made to an industrial plant. Also, the excise tax on beer generally is reduced from $7.20 per barrel to $6 per barrel beginning July 1, 2023.14
Film and digital media production tax credit
Effective January 1, 2022, film and digital media production tax credits may be claimed against sales and use taxes.15
Under existing law, film and digital media production tax credits may be claimed against corporation business tax and insurance premiums tax at full face value. The existing credit may be transferred up to three times. As amended, eligible production companies and transferees may claim 78% of the credit’s value against sales and use taxes.16
Effective July 1, 2021, charges to most places of amusement, entertainment or recreation are no longer subject to the admissions tax.17
Charges for admissions that were paid prior to July 1, 2021 are subject to tax even if the event occurs after this date. Admissions to motion pictures where the charge is more than $5 remain subject to a 6% tax.
Tax amnesty program
The budget legislation directs the Connecticut Commissioner of Revenue Services to establish a tax amnesty program from November 1, 2021 through January 31, 2022.18
Amnesty is available for most taxes administered by the Department of Revenue Services and applies to any taxable period ending on or before December 30, 2020. Upon completing all the requirements of the tax amnesty program, the taxpayer is entitled to a 75% reduction in interest. Also, the Commissioner will not seek to collect any civil penalties or pursue criminal prosecution if the amnesty has been granted and the tax and interest determined to be due are paid. Amnesty will not be granted if the person: (i) is a party to any criminal investigation or to any criminal litigation pending on July 1, 2021 in any U.S. or Connecticut court; (ii) is a party to a closing agreement with the Commissioner; (iii) has made an offer of compromise that has been accepted by the Commissioner; or (iv) is a party to a managed audit agreement.
This year’s Connecticut budget legislation provides a variety of changes that increase tax revenue from corporations but includes a measure of tax relief for certain individuals and targeted industries. The extension of what had initially been envisioned as a temporary corporation business tax surcharge and the delay of the planned phaseout of the capital base tax should serve to remind taxpayers that temporary measures and planned phaseouts that are promised do not always occur on schedule, especially under budget pressures. The positive adjustment to the R&D credit from the perspective of increasing the R&D credit cap (which had been previously done during the last decade) could be offset somewhat by the limitation on the length of time in which such credit can be carried forward.
The sales tax provisions are directed at specific targeted industries that have been especially hampered by the COVID-19 pandemic. One of the most innovative items in the budget is the provision allowing restaurants to keep 100% of the sales tax that they collect for one week. The legislation provides restaurants with some flexibility because they are able to select the week for tax relief from among three different weeks provided in the law. This provision will enable restaurants to maximize this tax benefit by choosing the applicable week (one this summer, another near the winter holidays, and a third next spring). Targeted sales tax relief also is provided for brew pubs and film and digital media production. The reduction in the types of entertainment and recreation that are subject to the admissions tax also should provide welcome relief to these industries adversely affected by the pandemic.
The tax amnesty program also should provide relief to businesses and individuals who owe unpaid taxes. This type of program historically has been adopted by many states to increase compliance and enhance revenue at the margins. Connecticut’s decision to implement an amnesty could spur a new wave of programs from states as the economy continues to recover from the effects of the pandemic. The Department is expected to provide guidance to implement the program prior to its commencement on November 1, 2021.
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