OLR Bill Analysis

sSB 1

AN ACT CONCERNING THE PRESERVATION AND CREATION OF JOBS IN CONNECTICUT.

SUMMARY:

This bill:

1. exempts certain businesses with annual net incomes of $ 50,000 or less from the $ 250 business entity tax for two years;

2. imposes an 8. 97% tax in lieu of regular state income tax on certain bonuses of $ 1 million or more paid or awarded to Connecticut taxpayers by companies that received direct funding from the federal Troubled Asset Relief Program (TARP) or certain of their affiliates; and

3. establishes a program to provide loans and loan guarantees to companies with fewer than 50 employees and authorizes up to $ 20 million in state general obligation bonding to fund it.

EFFECTIVE DATE: The business entity tax exemption and the TARP tax take effect on passage and apply to tax years starting on or after January 1, 2010. The small business assistance program and bond authorization are effective July 1, 2010.

1 – BUSINESS ENTITY TAX EXEMPTION

The bill exempts certain businesses from the annual $ 250 business entity tax for the 2010 and 2011 tax years. The exemption applies to any business that, for the applicable tax year, (1) reports $ 50,000 or less in net income on its annual informational income return filed with the Department of Revenue Services (DRS) (see BACKGROUND) and (2) employs at least one full-time person in Connecticut for at least eight consecutive months during the year. For purposes of the exemption, a “full-time employee” is an employee or member of, or partner in, the business who works at least 35 hours per week.

The business entity tax applies to foreign or domestic S corporations, limited liability companies, limited liability partnerships, and limited partnerships that must file annual reports with the secretary of the state.

2 & 3 – TARP BONUS TAX

The bill imposes an 8. 97% tax on any bonus totaling $ 1 million or more paid or awarded to a Connecticut taxpayer during the 2010 and 2011 tax years by a “TARP recipient. ” Under the bill, a TARP recipient is (1) any entity that received funds directly from the TARP on or after October 3, 2008; (2) an entity that, for federal tax purposes, is considered part of the same affiliated group as an entity that received TARP funds (see BACKGROUND); or (3) a partnership that is more than 50% owned, directly or indirectly, by one or more of the foregoing entities.

The 8. 97% tax on a covered TARP bonus applies in lieu of the 6. 5% state income tax otherwise due on Connecticut taxable income over $ 1 million. Unlike the graduated income tax rates applicable to other taxable income, the flat 8. 97% rate applies to the entire covered bonus and is in addition to state income tax due on a taxpayer's other taxable income, if any. Regular state income tax rates and provisions apply to other taxable income.

The TARP bonus tax covers retention or incentive payments or other bonuses over and above a taxpayer's regular periodic pay rate that are either (1) paid in the 2010 or 2011 tax years or (2) paid in the future for work performed during those years. Covered bonuses can be in the form of cash and noncash payments, loans, and arrangements for future payments. In addition, if a TARP recipient reimburses a taxpayer for the bonus tax, the reimbursement is considered part of the bonus and is also subject to the bonus tax.

The bonus tax does not apply (1) to commissions, welfare or fringe benefits, or expense reimbursements or (2) when a taxpayer, without receiving any other benefit from the TARP recipient in return, irrevocably waives his or her right to the full amount of the bonus payment or returns it before December 31 of the applicable tax year.

The tax applies regardless of whether the TARP recipient has repaid the federal government any or all funds it received from the TARP.

Under the bill, TARP recipients that pay or award TARP bonuses of $ 1 million or more during the 2010 or 2011 tax years must comply with applicable state income tax withholding requirements on those payments.

4 & 5 – SMALL BUSINESS ASSISTANCE PROGRAM

The bill requires the Department of Economic and Community Development (DECD) to establish a program to provide direct loans and loan guarantees to businesses with fewer than 50 employees. It authorizes up to $ 20 million in state general obligation bonds to fund the program and establishes a separate, nonlapsing small business assistance account in the General Fund to provide the loans and loan guarantees.

As part of the program, the bill allows DECD to:

1. guarantee or promise in advance to guarantee loans or cause the loans to be guaranteed;

2. make direct loans or cause them to be made, if such loans are not available in the private market; and

3. participate in agreements with other state or federal agencies to provide loans or loan guarantees that meet the bill's requirements.

BACKGROUND

Informational Return for Pass-Through Businesses

By law, each pass-through business that has income derived from or connected to Connecticut sources must file an annual return containing information about its finances, including its income, and its resident and nonresident partners or members. The requirement applies to S corporations; general, limited, and limited liability partnerships; limited liability companies treated as partnerships under federal tax laws; and trusts and estates (CGS 12-726).

Affiliated Group

For purposes of identifying TARP recipients, the bill incorporates by reference the federal definition of an “affiliated group. ” Under federal tax law, an “affiliated group” is a group of corporations or corporate chains connected to the same parent corporation in which (1) one or more of the corporations included in the group directly owns at least 80% of the voting power and 80% of the total value of the common stock of each of the other included corporations and (2) their common parent directly owns at least 80% of the voting power and 80% of the total value of the common stock of at least one of the included corporations (IRC 1504).

Related Bill

SB 450, Fill 266, favorably reported by the Commerce Committee, contains the same TARP tax, small business loan program, and bond authorization as this bill.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute

Yea

31

Nay

17

(04/01/2010)