CLIENT ALERT: June 16 2004

Connecticut Partnership & S Corporation Withholding

Following in the footsteps of New Jersey and New York, Connecticut has now joined the list of states requiring partnerships and S corporations to withhold and remit state income taxes on behalf of their non-resident partners based on their share of Connecticut source income.

Effective May 6, 2004 and retroactive back to January 1, 2004, most partnerships and S corporations will be required to remit payments to the state on behalf of their non-resident shareholders. Below, is a summary of the regulations and its effects on the entities and their members:

• Affected entities are those entities that are required to file a Federal Form 1065 or 1120S and that have income, gain, loss or deduction from sources within Connecticut.
• An entity will be required to make payments on behalf of nonresident individuals, nonresident trusts, nonresident estates or a pass through entity when their CT source income exceeds $999 ($499 for publicly traded partnerships) and the shareholders have not made an election to be included in the entity's group (composite) return.
• A shareholder will not be required to file a CT income tax return solely because withholding was remitted on their behalf, however if the taxpayer has income from other CT sources, or if the withholding remitted is not enough to cover their CT tax liability, a CT return will be required.
• The payment remitted will be calculated by multiplying the shareholder's CT source income from the entity by 5 %. The entity is required to remit the entire 5 % and cannot take any other of the shareholder's CT income or other tax attributes into account.
• Estimated CT composite payments must be made once the shareholder's annual tax is projected, or estimated to be in excess of $1,000. Accordingly, an entity may be required to remit quarterly for some of its shareholders, while others will only have their taxes remitted annually.
• Quarterly estimated payments are due on June 15 (with a catch-up for the first quarter this year), September 15 and January 15. Beginning next year, an April 15 payment will also be required. Each quarterly estimate will be remitted with Form CT-1065/CT-1120SI ES.
• Entities will be subject to interest and penalty assessments if the taxes are not timely paid. The penalty assessments can be collected from either the entity or the individuals themselves.
• Each entity will be required to furnish written information to their shareholders, by the 15th day of the third month following the close of their tax year, containing the amounts remitted on their behalf.
• A group return may be filed on behalf of any 2 or more shareholders (previously a group return could only be a minimum of 10 shareholders), and thus eliminate the need to remit taxes on each shareholder's behalf. In order for an individual to qualify for this treatment, they must:

1) Be a nonresident individual for the entire taxable year.
2) Not have maintained a permanent place of abode in CT during the year.
3) Not have income derived from or connected with CT sources from more than one pass through entity (if applicable, applies to shareholder's spouse also).
4) Waive the right to claim any CT personal exemptions.
5) Not be subject to the CT AMT liability for the tax year.
6) Have the same taxable year of all other electing shareholders, and
7) Complete Form CT-2NA, which will allow them to be included in the group filing.

Please contact any member of the tax department at your convenience if you would like further information regarding the impact of this new legislation.