After $1.1B Conn. tax measure, penalties waived for late filers

Connecticut’s tax collector is notifying nearly 10,000 business owners that they are eligible for waivers on penalties, which were assessed after they were late submitting estimated taxes for a new “passthrough entity” filing option the state established last year as a workaround to help some limit the impact of changes in federal tax law.

The Connecticut Department of Revenue Services alerted businesses last month of the waiver after the Connecticut General Assembly authorized DRS to do so in June.

Penalties and interest not be levied for entities that pay the full amount of any taxes owed within one year of the original due date and any filers that have already paid penalties allowed to apply them against this year’s taxes or any outstanding amounts otherwise. The waivers will be applied automatically, with companies not required to file any form to get approval.

Former Gov. Dannel P. Malloy signed the passthrough entity tax into law in 2018, his final year in office. For the 2019 fiscal year that ended in June, more than $1.1 billion in business income was filed under the new passthrough entity reporting option, according to preliminary estimates by the Department of Revenue Services that had yet to be finalized as of Friday. That amounted to about 10 cents on every dollar reported as income for fiscal 2019, whether filed with personal or business tax forms.

As described by the Connecticut Business & Industry Association, the passthrough entity provision allows owners of limited liability companies and partnerships to pay income taxes using business forms rather than using personal income tax forms as they had in the past. Those amounts qualify for businessexpense deductions from federal income taxes, and are offset by a personal income tax credit intended to lessen the impact of the federal cap.

In testifying in support of the bill in early 2018, Malloy’s budget chief Ben Barnes stated the measure could shield more than $220 million annually in collective income earned by some 170,000 business owners in Connecticut from the federal Tax Cuts and Jobs Act of 2017, which created a $10,000 cap on previously unlimited IRS deductions for payments made on state and local taxes.

This year, the Connecticut General Assembly reduced the value of that personal income tax credit, with the result of business owners having to pay an additional $53 million in taxes, according to CBIA.

With the Connecticut General Assembly having modified other elements of the new state law, confusion was compounded for taxpayers already wrestling with the original, according to tax attorneys in Pullman & Comley which has offices in Bridgeport and Stamford.

“The timing of the ... enactment, and its retroactive application, created confusion for passthrough entities, particularly regarding when estimated tax payments were due and the amount owed,” Pullman & Comley attorneys wrote.

Matthew Brown / Hearst Connecticut Media Small businesses exhibit in April 2019 at a Greenwich showcase sponsored by the Greenwich Chamber of Commerce. The Connecticut Department of Revenue Services is waiving penalties for some 10,000 businesses statewide late filing taxes, after confusion over changes to Connecticut tax law following the 2018 enactment of a new filing option for “passthrough” entities like limited liability companies and partnerships.