Bradley attorney Bruce Ely was quoted in Bloomberg Law on Connecticut’s new pass-through entity tax approach. To ease the pain of the Internal Revenue Service’s (IRS) cap on state and local tax deductions, Connecticut created a new tax on these entities, which is offset by a corresponding personal income tax credit. The amount of the tax is a deductible expense on federal returns. The workaround applies to pass-through businesses, such as LLCs and partnerships, where the tax burden usually falls on individuals. While the state’s workaround may be viable for now, the IRS issued final regulations in June that banned one type of workaround attempted by some states, including New York and Connecticut. So far four other states have enacted an elective pass-through entity tax, while Connecticut has the only mandatory tax.
Ely explained that Connecticut’s approach is likely more viable because it is mandatory—meaning individual partners or shareholders have no control over whether or not they keep pass-through entity status.
“My thinking is, the Service may try to attack these, but I think they’ve got tough sledding, especially with a state like Connecticut that imposes a mandatory entity-level tax,” Ely said. “That’s not something the individual taxpayer can game the system.”
There may be a good argument for elective taxes, too, he said. All partners are bound by the choice they make, he added.
Other states might be taking a wait-and-see approach on whether they take a similar step, Ely said.
The complete article, “Connecticut Residents Warned State’s SALT Workaround Won’t Hold Up” first appeared in Bloomberg Law on August 6, 2019.