The Connecticut Department of Revenue Services (DRS) released guidance that allows a pass-through entity (PTE) to remit tax on behalf of its members relative to the Connecticut-source guaranteed payments of its nonresident individual members.¹ Connecticut's pass-through entity tax base calculation does not include guaranteed payments, so nonresident individuals generally must file a 2018 Connecticut personal income tax return and remit tax on their Connecticut-source guaranteed payment. Given the administrative burden this places on the DRS, the PTE and the PTE's partners, members or shareholders, as the case may be (each a "member" and collectively, "members"), this supplemental filing allows a PTE to report and remit tax to the DRS on behalf of the PTE's nonresident members. If the PTE pays the tax and executes the associated agreement, a nonresident individual PTE member's tax filing responsibility generally is fulfilled, unless the PTE member has other Connecticut-source income.

Requirements for PTE to pay tax on behalf of nonresident members

The PTE must complete the new Nonresident Member Income Tax Remittance Agreement (agreement) to pay the tax on behalf of its nonresident members. The agreement may be submitted by or before the return due date (i.e., March 15, 2019, for CY 2018 returns) or the extended six-month due date, but interest will be due on any tax payment made during extension. Additionally, the agreement must be filed (separately from the PTE's own tax extension filing) before filing the return. When submitting the agreement, the PTE must include the name, phone number and email address of a contact person. If the contact person is a practitioner representing the PTE, a power of attorney must accompany the form. Once complete and approved, the DRS will return a copy of the fully executed agreement to the PTE contact person.

The PTE tax return takes the form of the executed agreement and a schedule that identifies each of the PTE's nonresident members for which the payment is being made. A sample schedule is attached to the agreement. The tax remittance is computed on a member-by-member basis and equals the tax on total Connecticut-source income (including the guaranteed payment) of the nonresident member less that member's share of the PTE tax credit. If the member's share of the PTE tax credit exceeds the balance due for those members, no refund will be issued. The PTE must attach to each Schedule CT K-1 the amount of tax the PTE paid on behalf of each member.

The agreement, the schedule and the tax payment must be mailed to the DRS. If the PTE files an extension, a tentative tax payment must be made by the due date of the PTE tax return. If a payment is due with the extended return, interest will be charged. It should be noted that the agreement is binding and the PTE will not be able to file a refund claim other than a refund of the extension payment. If there is an overpayment of tax, the nonresident member would have to file the claim.

Implications

Giving PTEs the option to remit tax on the Connecticut-source guaranteed payments of their nonresident individual members could reduce the administrative burden on the PTE, its members and the DRS. When a PTE files and pays tax on behalf of its nonresident individual members, the member does not need to file an individual Form CT-1040NR/PY unless he or she has Connecticut-source income from other sources besides his or her income from the PTE. With CY 2018 PTE tax payments due March 15, 2019, affected taxpayers should quickly determine whether they will utilize this option and file accordingly.

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ENDNOTES

¹ Conn. Dept. of Rev. Svcs., Pass-Through Entities (PEs) with nonresident members who receive guaranteed payments (last visited March 7, 2019). For additional guidance related to Connecticut's pass-through entity tax, see the Conn. Dept. of Rev. Svcs., Pass-Through Entity Tax (last visited March 7, 2019).