Connecticut Seal

General Assembly

File No. 641

    February Session, 2018

House Bill No. 5581

House of Representatives, April 23, 2018

The Committee on Finance, Revenue and Bonding reported through REP. ROJAS of the 9th Dist., Chairperson of the Committee on the part of the House, that the bill ought to pass.

AN ACT CONCERNING FEDERAL TAX BENEFITS AND THE CAPITAL STOCK TAX RATE.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. Subparagraphs (A) and (B) of subdivision (20) of subsection (a) of section 12-701 of the 2018 supplement to the general statutes are repealed and the following is substituted in lieu thereof (Effective from passage and applicable to taxable years commencing on or after January 1, 2017):

(20) "Connecticut adjusted gross income" means adjusted gross income, with the following modifications:

(A) There shall be added thereto:

(i) [to] To the extent not properly includable in gross income for federal income tax purposes, any interest income from obligations issued by or on behalf of any state, political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity, exclusive of such income from obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut and exclusive of any such income with respect to which taxation by any state is prohibited by federal law; [,]

(ii) [any] Any exempt-interest dividends, as defined in Section 852(b)(5) of the Internal Revenue Code, exclusive of such exempt-interest dividends derived from obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut and exclusive of such exempt-interest dividends derived from obligations, the income with respect to which taxation by any state is prohibited by federal law; [,]

(iii) [any] Any interest or dividend income on obligations or securities of any authority, commission or instrumentality of the United States which federal law exempts from federal income tax but does not exempt from state income taxes; [,]

(iv) [to] To the extent included in gross income for federal income tax purposes for the taxable year, the total taxable amount of a lump sum distribution for the taxable year deductible from such gross income in calculating federal adjusted gross income; [,]

(v) [to] To the extent properly includable in determining the net gain or loss from the sale or other disposition of capital assets for federal income tax purposes, any loss from the sale or exchange of obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut, in the income year such loss was recognized; [,]

(vi) [to] To the extent deductible in determining federal adjusted gross income, any income taxes imposed by this state; [,]

(vii) [to] To the extent deductible in determining federal adjusted gross income, any interest on indebtedness incurred or continued to purchase or carry obligations or securities the interest on which is exempt from tax under this chapter; [,]

(viii) [expenses] Expenses paid or incurred during the taxable year for the production or collection of income which is exempt from taxation under this chapter or the management, conservation or maintenance of property held for the production of such income, and the amortizable bond premium for the taxable year on any bond the interest on which is exempt from tax under this chapter to the extent that such expenses and premiums are deductible in determining federal adjusted gross income; [,]

(ix) [for] For property placed in service after [September 10, 2001, but prior to September 11, 2004, in taxable years ending after September 10, 2001,] September 27, 2017, fifty per cent of any additional allowance for depreciation under subsection (k) of Section 168 of the Internal Revenue Code, [as provided by Section 101 of the Job Creation and Worker Assistance Act of 2002,] to the extent deductible in determining federal adjusted gross income; [,]

(x) [to] To the extent deductible in determining federal adjusted gross income, the deduction allowable as qualified domestic production activities income, pursuant to Section 199 of the Internal Revenue Code; [,]

(xi) [to] To the extent not properly includable in gross income for federal income tax purposes for the taxable year, any income from the discharge of indebtedness, in taxable years ending after December 31, 2008, in connection with any reacquisition, after December 31, 2008, and before January 1, 2011, of an applicable debt instrument or instruments, as those terms are defined in Section 108 of the Internal Revenue Code, as amended by Section 1231 of the American Recovery and Reinvestment Act of 2009, the inclusion of which income in federal gross income for the taxable year is deferred, as provided by said Section 1231; [,]

(xii) [to] To the extent not properly includable in gross income for federal income tax purposes, an amount equal to (I) any distribution from a manufacturing reinvestment account not used in accordance with subdivision (3) of subsection (c) of section 32-9zz to the extent that a contribution to such account was subtracted from federal adjusted gross income pursuant to clause (xix) of subparagraph (B) of this subdivision in computing Connecticut adjusted gross income for the current or a preceding taxable year, and (II) any return of money from a manufacturing reinvestment account pursuant to subsection (d) of section 32-9zz to the extent that a contribution to such account was subtracted from federal adjusted gross income pursuant to clause (xix) of subparagraph (B) of this subdivision in computing Connecticut adjusted gross income for the current or a preceding taxable year; [, and]

(xiii) [to] To the extent not properly includable in gross income for federal income tax purposes, an amount equal to any compensation required to be recognized under Section 457A of the Internal Revenue Code that is attributable to services performed within this state; and

(xiv) For taxable years commencing on or after January 1, 2018, fifty per cent of any deduction claimed for federal purposes under Section 179 of the Internal Revenue Code.

(B) There shall be subtracted therefrom:

(i) [to] To the extent properly includable in gross income for federal income tax purposes, any income with respect to which taxation by any state is prohibited by federal law; [,]

(ii) [to] To the extent allowable under section 12-718, exempt dividends paid by a regulated investment company; [,]

(iii) To the extent properly includable in gross income for federal income tax purposes, the amount of any refund or credit for overpayment of income taxes imposed by this state, or any other state of the United States or a political subdivision thereof, or the District of Columbia; [, to the extent properly includable in gross income for federal income tax purposes,]

(iv) [to] To the extent properly includable in gross income for federal income tax purposes and not otherwise subtracted from federal adjusted gross income pursuant to clause (x) of this subparagraph in computing Connecticut adjusted gross income, any tier 1 railroad retirement benefits; [,]

(v) [to] To the extent any additional allowance for depreciation under Section 168(k) of the Internal Revenue Code [, as provided by Section 101 of the Job Creation and Worker Assistance Act of 2002,] for property placed in service after [December 31, 2001, but prior to September 10, 2004] September 27, 2017, was added to federal adjusted gross income pursuant to subparagraph (A)(ix) of this subdivision in computing Connecticut adjusted gross income, [for a taxable year ending after December 31, 2001, twenty-five per cent of such additional allowance for depreciation in each of the four succeeding taxable years,] the remaining amount of the disallowed portion of the additional allowance in the succeeding taxable year;

(vi) [to] To the extent properly includable in gross income for federal income tax purposes, any interest income from obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut; [,]

(vii) [to] To the extent properly includable in determining the net gain or loss from the sale or other disposition of capital assets for federal income tax purposes, any gain from the sale or exchange of obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut, in the income year such gain was recognized; [,]

(viii) [any] Any interest on indebtedness incurred or continued to purchase or carry obligations or securities the interest on which is subject to tax under this chapter but exempt from federal income tax, to the extent that such interest on indebtedness is not deductible in determining federal adjusted gross income and is attributable to a trade or business carried on by such individual; [,]

(ix) [ordinary] Ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income which is subject to taxation under this chapter but exempt from federal income tax, or the management, conservation or maintenance of property held for the production of such income, and the amortizable bond premium for the taxable year on any bond the interest on which is subject to tax under this chapter but exempt from federal income tax, to the extent that such expenses and premiums are not deductible in determining federal adjusted gross income and are attributable to a trade or business carried on by such individual; [,]

(x) (I) [for] For taxable years commencing prior to January 1, 2019, for a person who files a return under the federal income tax as an unmarried individual whose federal adjusted gross income for such taxable year is less than fifty thousand dollars, or as a married individual filing separately whose federal adjusted gross income for such taxable year is less than fifty thousand dollars, or for a husband and wife who file a return under the federal income tax as married individuals filing jointly whose federal adjusted gross income for such taxable year is less than sixty thousand dollars or a person who files a return under the federal income tax as a head of household whose federal adjusted gross income for such taxable year is less than sixty thousand dollars, an amount equal to the Social Security benefits includable for federal income tax purposes;

(II) [for] For taxable years commencing prior to January 1, 2019, for a person who files a return under the federal income tax as an unmarried individual whose federal adjusted gross income for such taxable year is fifty thousand dollars or more, or as a married individual filing separately whose federal adjusted gross income for such taxable year is fifty thousand dollars or more, or for a husband and wife who file a return under the federal income tax as married individuals filing jointly whose federal adjusted gross income from such taxable year is sixty thousand dollars or more or for a person who files a return under the federal income tax as a head of household whose federal adjusted gross income for such taxable year is sixty thousand dollars or more, an amount equal to the difference between the amount of Social Security benefits includable for federal income tax purposes and the lesser of twenty-five per cent of the Social Security benefits received during the taxable year, or twenty-five per cent of the excess described in Section 86(b)(1) of the Internal Revenue Code;

(III) [for] For the taxable year commencing January 1, 2019, and each taxable year thereafter, for a person who files a return under the federal income tax as an unmarried individual whose federal adjusted gross income for such taxable year is less than seventy-five thousand dollars, or as a married individual filing separately whose federal adjusted gross income for such taxable year is less than seventy-five thousand dollars, or for a husband and wife who file a return under the federal income tax as married individuals filing jointly whose federal adjusted gross income for such taxable year is less than one hundred thousand dollars or a person who files a return under the federal income tax as a head of household whose federal adjusted gross income for such taxable year is less than one hundred thousand dollars, an amount equal to the Social Security benefits includable for federal income tax purposes; and

(IV) [for] For the taxable year commencing January 1, 2019, and each taxable year thereafter, for a person who files a return under the federal income tax as an unmarried individual whose federal adjusted gross income for such taxable year is seventy-five thousand dollars or more, or as a married individual filing separately whose federal adjusted gross income for such taxable year is seventy-five thousand dollars or more, or for a husband and wife who file a return under the federal income tax as married individuals filing jointly whose federal adjusted gross income from such taxable year is one hundred thousand dollars or more or for a person who files a return under the federal income tax as a head of household whose federal adjusted gross income for such taxable year is one hundred thousand dollars or more, an amount equal to the difference between the amount of Social Security benefits includable for federal income tax purposes and the lesser of twenty-five per cent of the Social Security benefits received during the taxable year, or twenty-five per cent of the excess described in Section 86(b)(1) of the Internal Revenue Code; [,]

(xi) [to] To the extent properly includable in gross income for federal income tax purposes, any amount rebated to a taxpayer pursuant to section 12-746; [,]

(xii) [to] To the extent properly includable in the gross income for federal income tax purposes of a designated beneficiary, any distribution to such beneficiary from any qualified state tuition program, as defined in Section 529(b) of the Internal Revenue Code, established and maintained by this state or any official, agency or instrumentality of the state; [,]

(xiii) [to] To the extent allowable under section 12-701a, contributions to accounts established pursuant to any qualified state tuition program, as defined in Section 529(b) of the Internal Revenue Code, established and maintained by this state or any official, agency or instrumentality of the state; [,]

(xiv) [to] To the extent properly includable in gross income for federal income tax purposes, the amount of any Holocaust victims' settlement payment received in the taxable year by a Holocaust victim; [,]

(xv) [to] To the extent properly includable in gross income for federal income tax purposes of an account holder, as defined in section 31-51ww, interest earned on funds deposited in the individual development account, as defined in section 31-51ww, of such account holder; [,]

(xvi) [to] To the extent properly includable in the gross income for federal income tax purposes of a designated beneficiary, as defined in section 3-123aa, interest, dividends or capital gains earned on contributions to accounts established for the designated beneficiary pursuant to the Connecticut Homecare Option Program for the Elderly established by sections 3-123aa to 3-123ff, inclusive; [,]

(xvii) [to] To the extent properly includable in gross income for federal income tax purposes, any income received from the United States government as retirement pay for a retired member of (I) the Armed Forces of the United States, as defined in Section 101 of Title 10 of the United States Code, or (II) the National Guard, as defined in Section 101 of Title 10 of the United States Code; [,]

(xviii) [to] To the extent properly includable in gross income for federal income tax purposes for the taxable year, any income from the discharge of indebtedness in connection with any reacquisition, after December 31, 2008, and before January 1, 2011, of an applicable debt instrument or instruments, as those terms are defined in Section 108 of the Internal Revenue Code, as amended by Section 1231 of the American Recovery and Reinvestment Act of 2009, to the extent any such income was added to federal adjusted gross income pursuant to subparagraph (A)(xi) of this subdivision in computing Connecticut adjusted gross income for a preceding taxable year; [,]

(xix) [to] To the extent not deductible in determining federal adjusted gross income, the amount of any contribution to a manufacturing reinvestment account established pursuant to section 32-9zz in the taxable year that such contribution is made; [,]

(xx) [to] To the extent properly includable in gross income for federal income tax purposes, (I) for the taxable year commencing January 1, 2015, ten per cent of the income received from the state teachers' retirement system, (II) for the taxable years commencing January 1, 2016, January 1, 2017, and January 1, 2018, twenty-five per cent of the income received from the state teachers' retirement system, and (III) for the taxable year commencing January 1, 2019, and each taxable year thereafter, fifty per cent of the income received from the state teachers' retirement system or the percentage, if applicable, pursuant to clause (xxi) of this subparagraph; [,]

(xxi) [to] To the extent properly includable in gross income for federal income tax purposes, except for retirement benefits under clause (iv) of this subparagraph and retirement pay under clause (xvii) of this subparagraph, for a person who files a return under the federal income tax as an unmarried individual whose federal adjusted gross income for such taxable year is less than seventy-five thousand dollars, or as a married individual filing separately whose federal adjusted gross income for such taxable year is less than seventy-five thousand dollars, or as a head of household whose federal adjusted gross income for such taxable year is less than seventy-five thousand dollars, or for a husband and wife who file a return under the federal income tax as married individuals filing jointly whose federal adjusted gross income for such taxable year is less than one hundred thousand dollars, (I) for the taxable year commencing January 1, 2019, fourteen per cent of any pension or annuity income, (II) for the taxable year commencing January 1, 2020, twenty-eight per cent of any pension or annuity income, (III) for the taxable year commencing January 1, 2021, forty-two per cent of any pension or annuity income, (IV) for the taxable year commencing January 1, 2022, fifty-six per cent of any pension or annuity income, (V) for the taxable year commencing January 1, 2023, seventy per cent of any pension or annuity income, (VI) for the taxable year commencing January 1, 2024, eighty-four per cent of any pension or annuity income, and (VII) for the taxable year commencing January 1, 2025, any pension or annuity income; [,]

(xxii) [the] The amount of lost wages and medical, travel and housing expenses, not to exceed ten thousand dollars in the aggregate, incurred by a taxpayer during the taxable year in connection with the donation to another person of an organ for organ transplantation occurring on or after January 1, 2017; [, and]

(xxiii) [to] To the extent properly includable in gross income for federal income tax purposes, the amount of any financial assistance received from the Crumbling Foundations Assistance Fund or paid to or on behalf of the owner of a residential building pursuant to sections 8-442 and 8-443; and

(xxiv) To the extent any portion of a deduction under Section 179 of the Internal Revenue Code was added to federal adjusted gross income pursuant to subparagraph (A)(xiv) of this subdivision in computing Connecticut adjusted gross income, the remaining amount of such disallowed portion of the deduction in the succeeding taxable year.

Sec. 2. Subsection (b) of section 12-217 of the 2018 supplement to the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(b) (1) For purposes of determining net income under this section, the deduction allowed for depreciation shall be determined as provided under the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended, provided in making such determination, the provisions of Section 168(k) of said code shall not apply.

(2) (A) For purposes of determining net income under this section for taxable years ending after December 31, 2008, and to the extent any income from the discharge of indebtedness, under Section 108 of the Internal Revenue Code, as amended by Section 1231 of the American Recovery and Reinvestment Act of 2009, in connection with any reacquisition, after December 31, 2008, and before January 1, 2011, of an applicable debt instrument or instruments, as those terms are defined in said Section 108, as amended by said Section 1231, is not properly includable in gross income for federal income tax purposes for the taxable year, any deferral of the recognition of any such income shall not be allowed.

(B) To the extent that any income from the discharge of indebtedness in connection with any reacquisition, after December 31, 2008, and before January 1, 2011, of an applicable debt instrument or instruments, as those terms are defined in Section 108 of the Internal Revenue Code, as amended by Section 1231 of the American Recovery and Reinvestment Act of 2009, is properly includable in gross income for federal income tax purposes for the taxable year, any such income shall be deductible in computing net income under this section for a taxable year ending after December 31, 2008, to the extent that the deferral of recognition of such income from such discharge was not allowed pursuant to subparagraph (A) of this subdivision in computing net income for a preceding taxable year.

(C) For income years commencing on or after January 1, 2018, fifty per cent of any deduction claimed under Section 179 of the Internal Revenue Code for federal income tax purposes shall be disallowed. To the extent such a deduction is disallowed for purposes of computing the tax under this chapter, the remaining amount of the disallowed portion of the deduction shall be allowed as a deduction in the succeeding income year.

Sec. 3. Subdivision (1) of subsection (a) of section 12-219 of the general statutes is repealed and the following is substituted in lieu thereof (Effective from passage):

(a) (1) Each company subject to the provisions of this part shall pay for the privilege of carrying on or doing business within the state, the larger of the tax, if any, imposed by section 12-214 and the tax calculated under this subsection. The tax calculated under this section shall be a tax of (A) three and one-tenth mills per dollar for [each] the income year commencing on or after January 1, 2018, and prior to January 1, 2019, (B) two and one-tenth mills per dollar for the income year commencing on or after January 1, 2019, and prior to January 1, 2020, (C) one and one-tenth mills per dollar for the income year commencing on or after January 1, 2020, and prior to January 1, 2021, and (D) zero mills per dollar on and after January 1, 2021, of the amount derived [(A)] (i) by adding [(i)] (I) the average value of the issued and outstanding capital stock, including treasury stock at par or face value, fractional shares, scrip certificates convertible into shares of stock and amounts received on subscriptions to capital stock, computed on the balances at the beginning and end of the taxable year or period, the average value of surplus and undivided profit computed on the balances at the beginning and end of the taxable year or period, and [(ii)] (II) the average value of all surplus reserves computed on the balances at the beginning and end of the taxable year or period, [(B)] (ii) by subtracting from the sum so calculated [(i)] (I) the average value of any deficit carried on the balance sheet computed on the balances at the beginning and end of the taxable year or period, and [(ii)] (II) the average value of any holdings of stock of private corporations including treasury stock shown on the balance sheet computed on the balances at the beginning and end of the taxable year or period, and [(C)] (iii) by apportioning the remainder so derived between this and other states under the provisions of section 12-219a, provided in no event shall the tax so calculated exceed one million dollars or be less than two hundred fifty dollars.

This act shall take effect as follows and shall amend the following sections:

Section 1

from passage and applicable to taxable years commencing on or after January 1, 2017

12-701(a)(20)(A) and (B)

Sec. 2

from passage

12-217(b)

Sec. 3

from passage

12-219(a)(1)

FIN

Joint Favorable

 

The following Fiscal Impact Statement and Bill Analysis are prepared for the benefit of the members of the General Assembly, solely for purposes of information, summarization and explanation and do not represent the intent of the General Assembly or either chamber thereof for any purpose. In general, fiscal impacts are based upon a variety of informational sources, including the analyst's professional knowledge. Whenever applicable, agency data is consulted as part of the analysis, however final products do not necessarily reflect an assessment from any specific department.


OFA Fiscal Note

State Impact:

Agency Affected

Fund-Effect

FY 19 $

FY 20 $

Department of Revenue Services

GF - Revenue Loss

11.4 million

29.2 million

Department of Revenue Services

GF - Revenue Impact

See Below

See Below

Note: GF=General Fund

Municipal Impact: None

Explanation

The bill phases out the capital base tax calculation method under the Corporation Business Tax, which results in a revenue loss of $11.4 million in FY 19, $29.2 million in FY 20, $46.2 million in FY 21, and $53 million in FY 22 and annually thereafter.

The bill also establishes an alternative schedule for bonus depreciation and asset expensing under the Personal Income Tax and Corporation Business Tax, which shifts the timing of a revenue deferral. This diminishes the degree to which revenue is reduced in the early years and is increased in later years.1 The total annual amount of state revenue impacted by the alternative bonus depreciation and asset expensing schedule is estimated to be less than $50 million and less than $20 million, respectively.

The Out Years

State Impact:

Agency Affected

Fund-Effect

FY 21 $

FY 22 $

FY 23 $

Department of Revenue Services

GF - Revenue Loss

46.2 million

53 million

53 million

Department of Revenue Services

GF - Revenue Impact

See Above

See Above

See Above

Note: GF=General Fund

Municipal Impact: None

Sources:

Department of Revenue Services

 

Joint Committee on Taxation Analysis of 2017 Tax Cuts and Jobs Act

OLR Bill Analysis

HB 5581

AN ACT CONCERNING FEDERAL TAX BENEFITS AND THE CAPITAL STOCK TAX RATE.

SUMMARY

This bill phases out the capital base tax on corporations over three years, from 2019 to 2021. Currently, the tax rate is 3.1 mills per dollar of a corporation's capital base (i.e., its net worth apportioned to Connecticut). Under the bill, the rate decreases to 2.1 mills in 2019, 1.1 mills in 2020, and zero mills beginning in 2021. The capital base tax is a component of the state's corporation business tax. Under current law, for most corporations, the tax rate is (1) 7.5% of net income, (2) 3.1 mills per dollar of capital base (up to $1 million), or (3) $250, whichever produces the larger tax.

The bill also requires taxpayers to make certain adjustments to federal business tax deductions for bonus depreciation and asset expensing for purposes of state personal income and corporation business tax (see BACKGROUND). Beginning with the 2017 tax year, it requires individuals receiving income from pass-through businesses (e.g., limited liability partnerships and limited liability companies) to add back half of the federal bonus depreciation deduction for property placed in service after September 27, 2017, when calculating their Connecticut adjusted gross income for the state personal income tax. But it allows them to deduct the disallowed portion in the succeeding tax year. Existing law, unchanged by the bill, disallows the federal bonus depreciation deduction for state corporation business tax purposes.

The bill requires individuals and corporations, for state personal income and corporation business tax purposes, respectively, to add back half of the federal deduction for the cost of qualifying property (“section 179 property”). They must do so for tax years (for personal income tax) or income years (for corporation business tax) beginning on or after January 1, 2018. The bill allows them to deduct the disallowed portion in the succeeding tax year.

EFFECTIVE DATE: Upon passage; the personal income tax provisions are applicable to tax years beginning on or after January 1, 2017.

BACKGROUND

Bonus Depreciation Deduction (26 USC 168(k))

The federal Tax Cuts and Jobs Act of 2017 authorizes a first-year bonus depreciation deduction of 100% on qualified new and used property businesses place in service after September 27, 2017, and before January 1, 2023 (the rate phases down by 20% each year thereafter). Prior law generally provided for a 50% bonus depreciation deduction in 2017, 40% in 2018, and 30% in 2019.

Asset Expensing (26 USC 179)

Under federal law, businesses can elect to treat the cost of qualifying property (“section 179 property”) as a deductible expense rather than a capital expenditure, subject to a maximum deduction and investment limitation. The federal Tax Cuts and Jobs Act of 2017 expands the type of property that taxpayers may elect to treat as section 179 property and increases the (1) maximum deduction for section 179 expensing from $510,000 to $1 million and (2) investment limitation from $2.03 million to $2.5 million. The increases are permanent and inflation-adjusted each year. (The investment limitation reduces the maximum deduction allowed, dollar for dollar, by the amount of section 179 property placed in service during the tax year that exceeds the limit.)

Related Bill

sSB 11, favorably reported by the Finance, Revenue and Bonding Committee, requires business taxpayers to spread out their federal bonus depreciation and asset expensing deductions over four and five years, respectively.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable

Yea

47

Nay

4

(04/05/2018)

TOP

1 The alternative schedule for bonus depreciation and asset expensing under the bill occurs over two years.