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Connecticut Public Acts 1996

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Substitute Senate Bill No. 586

PUBLIC ACT NO. 96-175

AN ACT ELIMINATING THE CORPORATION BUSINESS TAX APPLICABLE TO S CORPORATIONS.

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

Section 1. Section 12-217 of the general statutes is repealed and the following is substituted in lieu thereof:

(a) In arriving at net income as defined in section 12-213, whether or not the taxpayer is taxable under the federal corporation net income tax, there shall be deducted from gross income, (A) all items deductible under the federal corporation net income tax law effective and in force on the last day of the income year except (1) any taxes imposed under the provisions of this chapter which are paid or accrued in the income year and in the income year commencing January 1, 1989, and thereafter, any taxes in any state of the United States or any political subdivision of such state, or the District of Columbia, imposed on or measured by the income or profits of a corporation which are paid or accrued in the income year, and (2) deductions for depreciation, which shall be allowed as provided in subsection (b) of this section, and (B) additionally, in the case of a regulated investment company, the sum of (1) the exempt-interest dividends, as defined in the federal corporation net income tax law, and (2) expenses, bond premium, and interest related to tax-exempt income that are disallowed as deductions under the federal corporation net income tax law, and (C) in the case of a taxpayer maintaining an international banking facility as defined in the laws of the United States or the regulations of the Board of Governors of the Federal Reserve System, as either may be amended from time to time, the gross income attributable to the international banking facility, provided, no expense or loss attributable to the international banking facility shall be a deduction under any provision of this section, and (D) additionally, in the case of all taxpayers, all dividends as defined in the federal income tax law effective and in force on the last day of the income year not otherwise deducted from gross income including dividends received from a DISC or former DISC as defined in Section 992 of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended, and dividends deemed to have been distributed by a DISC or former DISC as provided in Section 995 of said Internal Revenue Code, other than thirty per cent of dividends received from a domestic corporation in which the taxpayer owns less than twenty per cent of the total voting power and value of the stock of such corporation; except no deduction shall be allowed for (1) expenses related to dividends which are allowable as a deduction or credit under the federal corporation net income tax law and (2) federal taxes on income or profits, losses of other calendar or fiscal years, retroactive to include all calendar or fiscal years beginning after January 1, 1935, interest received from federal, state and local government securities, if any such deductions are allowed by the federal government. Notwithstanding anything in this section to the contrary, (1) any excess of the deductions provided in this section for any income year commencing on or after January 1, 1973, over the gross income for such year or the amount of such excess apportioned to this state under the provisions of section 12-218, shall be an operating loss of such income year and shall be deductible as an operating loss carry-over in each of the five income years following such loss year, provided the portion of such operating loss which may be deducted as an operating loss carry-over in any income year following such loss year shall be limited to the lesser of (i) any net income greater than zero of such income year following such loss year, or in the case of a company entitled to apportion its net income under the provisions of section 12-218, the amount of such net income which is apportioned to this state pursuant thereto, or (ii) the excess, if any, of such operating loss over the total of such net income for each of any prior income years following such loss year, such net income of each of such prior income years following such loss year for such purposes being computed without regard to any operating loss carry-over from such loss year allowed by this sentence and being regarded as not less than zero, and provided, further, the operating loss of any income year shall be deducted in any subsequent year, to the extent available therefor, before the operating loss of any subsequent income year is deducted, and (2) any net capital loss, as defined in the federal corporation net income tax law effective and in force on the last day of the income year, for any income year commencing on or after January 1, 1973, shall be allowed as a capital loss carry-over to reduce, but not below zero, any net capital gain, as so defined, in each of the five following income years, in order of sequence, to the extent not exhausted by the net capital gain of any of the preceding of such five following income years, and (3) any net capital losses allowed and carried forward from prior years to income years beginning on or after January 1, 1973, for federal income tax purposes by companies entitled to a deduction for dividends paid under the federal corporation net income tax law other than companies subject to the gross earnings taxes imposed under chapters 211 and 212, shall be allowed as a capital loss carry-over. This section shall not apply to a life insurance company as defined in the federal income tax law effective and in force on the last day of the income year. For purposes of this section, the unpaid loss reserve adjustment required for nonlife insurance companies under the provisions of Section 832(b)(5) of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended, shall be applied without making the adjustment in Subparagraph (B) of said Section 832(b)(5).

(b) (1) For purposes of determining net income under this section, the deduction allowed for depreciation in the determination of net income for purposes of the federal income tax shall, for the income year of any company commencing in 1981, 1982, 1983, 1984 or 1985, not exceed as a percentage of the total amount of such deduction allowed for federal income tax purposes, ninety-six per cent for the income year commencing in 1981, ninety-one per cent for the income year commencing in 1982, eighty-four per cent for the income year commencing in 1983, seventy-seven per cent for the income year commencing in 1984, and eighty-eight per cent for income years commencing in 1985, provided the portion of such depreciation allowed for federal income tax purposes but not allowed with respect to any of such income years in determining net income under this section, shall be allowed as a deduction in determining net income under this section, in equal amounts with each of such amounts computed as one-fifth of the total of such depreciation not allowed for such income year, with respect to each of the five successive income years of such company commencing with the third income year immediately following the income year in which such depreciation is not allowed. (2) Alternatively, for purposes of determining net income under this section, any company qualified to claim deduction for depreciation as described in subdivision (1) of this subsection for the income year commencing in 1981, 1982, 1983, 1984 or 1985, may elect, in lieu of the procedure under said subdivision (1), to depreciate property placed in service on or after January 1, 1981, in accordance with provisions of the federal corporation net income tax law applicable to depreciable property placed in service immediately prior to January 1, 1981, and such depreciation so determined for any of such years shall be allowed as a deduction in determining net income under this section for such income year, provided the Commissioner of Revenue Services may refuse to allow any such deduction submitted in accordance with this subdivision if the information in substantiation of such deduction is deemed unsatisfactory by said commissioner in relation to generally accepted accounting procedures.

(c) (1) Notwithstanding the provisions of subsections (a) and (b) of this section, "net income", in the case of an S corporation, means the PERCENTAGE OF THE nonseparately computed income or loss, as defined in Section 1366(a)(2) of the Internal Revenue Code, of such S corporation, without separate state adjustment pursuant to section 12-233 or 12-226a for the compensation of any officer or employee, to which shall be added [(1)] (A) any taxes imposed under the provisions of this chapter which are paid or accrued in the income year and [(2)] (B) any taxes in any state of the United States or any political subdivision of such state, or the District of Columbia, imposed on or measured by the income or profits of a corporation which are paid or accrued in the income year AS PROVIDED IN SUBDIVISION (2) OF THIS SUBSECTION. (2) FOR INCOME YEARS COMMENCING PRIOR TO JANUARY 1, 1997, "NET INCOME" MEANS ONE HUNDRED PER CENT OF THE AMOUNT COMPUTED UNDER SUBDIVISION (1) OF THIS SUBSECTION; FOR INCOME YEARS COMMENCING ON OR AFTER JANUARY 1, 1997, AND PRIOR TO JANUARY 1, 1998, "NET INCOME" MEANS NINETY PER CENT OF THE AMOUNT COMPUTED UNDER SUBDIVISION (1) OF THIS SUBSECTION; FOR INCOME YEARS COMMENCING ON OR AFTER JANUARY 1, 1998, AND PRIOR TO JANUARY 1, 1999, "NET INCOME" MEANS SEVENTY-FIVE PER CENT OF THE AMOUNT COMPUTED UNDER SUBDIVISION (1) OF THIS SUBSECTION; FOR INCOME YEARS COMMENCING ON OR AFTER JANUARY 1, 1999, AND PRIOR TO JANUARY 1, 2000, "NET INCOME" MEANS FIFTY-FIVE PER CENT OF THE AMOUNT COMPUTED UNDER SUBDIVISION (1) OF THIS SUBSECTION; FOR INCOME YEARS COMMENCING ON OR AFTER JANUARY 1, 2000, AND PRIOR TO JANUARY 1, 2001, "NET INCOME" MEANS THIRTY PER CENT OF THE AMOUNT COMPUTED UNDER SUBDIVISION (1) OF THIS SUBSECTION; FOR INCOME YEARS COMMENCING ON OR AFTER JANUARY 1, 2001, NET INCOME OF S CORPORATIONS AS COMPUTED UNDER SUBDIVISION (1) OF THIS SUBSECTION SHALL NOT BE SUBJECT TO THE TAX UNDER THIS CHAPTER. NO S CORPORATION SUBJECT TO THE TAX UNDER THE PROVISIONS OF THIS CHAPTER SHALL BE ELIGIBLE FOR ANY CREDIT AGAINST THE TAX OTHERWISE AVAILABLE TO TAXPAYERS UNDER THIS CHAPTER.

Sec. 2. Subdivision (10) of subsection (a) of section 12-701 of the general statutes is repealed and the following is substituted in lieu thereof: (10) "Connecticut fiduciary adjustment" means the net positive or negative total of the following items relating to income, gain, loss or deduction of a trust or estate: (A) There shall be added together [(A)] (i) 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, [(B)] (ii) 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, [(C)] (iii) 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, [(D)] (iv) 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, [(E)] (v) to the extent deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, any income taxes imposed by this state, [(F)] (vi) to the extent deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, 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, and [(G)] (vii) expenses paid or incurred during the taxable year for [(i)] the production or collection of income which is exempt from tax under this chapter, or [(ii)] 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 taxation under this chapter, to the extent that such expenses and premiums are deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries. (B) There shall be subtracted from the sum of such items [(a)] (i) 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, [(b)] (ii) to the extent allowable under section 12-718, exempt dividends paid by a regulated investment company, [(c)] (iii) with respect to any trust or estate which is a shareholder of an S corporation which is carrying on, or which has the right to carry on, business in this state, as said term is used in section 12-214, the amount of such shareholder's pro rata share of such corporation's nonseparately computed items, as defined in Section 1366 of the Internal Revenue Code, THAT IS SUBJECT TO TAX UNDER CHAPTER 208, IN ACCORDANCE WITH SUBSECTION (c) OF SECTION 12-217, AS AMENDED BY SECTION 1 OF THIS ACT multiplied by such corporation's apportionment fraction, if any, as determined in accordance with section 12-218, [(d)] [4m(iv) [0m 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, [(e)] (v) 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, [(f)] (vi) 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 taxable income prior to deductions relating to distributions to beneficiaries and [(g)] (vii) 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 taxable income prior to deductions relating to distributions to beneficiaries.

Sec. 3. Subdivision (20) of subsection (a) of section 12-701 of the general statutes is repealed and the following is substituted in lieu thereof:

(20) "Connecticut adjusted gross income" means adjusted gross income, with the following modifications: (A) There shall be added thereto (i) 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 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 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 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 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 the extent deductible in determining federal adjusted gross income, any income taxes imposed by this state, (vii) 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 and (viii) 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. (B) There shall be subtracted therefrom (i) 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 the extent allowable under section 12-718, exempt dividends paid by a regulated investment company, (iii) 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 or any province of Canada, to the extent properly includable in gross income for federal income tax purposes, (iv) to the extent properly includable in gross income for federal income tax purposes, any tier 1 railroad retirement benefits, (v) with respect to any natural person who is a shareholder of an S corporation which is carrying on, or which has the right to carry on, business in this state, as said term is used in section 12-214, the amount of such shareholder's pro rata share of such corporation's nonseparately computed items, as defined in Section 1366 of the Internal Revenue Code, THAT IS SUBJECT TO TAX UNDER CHAPTER 208, IN ACCORDANCE WITH SUBSECTION (c) OF SECTION 12-217, AS AMENDED BY SECTION 1 OF THIS ACT multiplied by such corporation's apportionment fraction, if any, as determined in accordance with section 12-218, (vi) 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 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 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 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 and (x) an amount equal to the difference between the amount of Social Security benefits includable for federal income tax purposes under the provisions of Section 13215 of the Omnibus Budget Reconciliation Act of 1993 and the amount of such Social Security benefits includable for federal income tax purposes under the provisions of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended, prior to August 10, 1993. With respect to a person who is the beneficiary of a trust or estate, there shall be added or subtracted, as the case may be, from adjusted gross income such person's share, as determined under section 12-714, in the Connecticut fiduciary adjustment.

Sec. 4. Subsection (c) of section 12-719 of the general statutes, as amended by section 1 of public act 95-263, is repealed and the following is substituted in lieu thereof:

(c) (1) With respect to each of its nonresident shareholders, each S corporation doing business in this state or having income derived from or connected with sources within this state shall, for each taxable period, either (A) timely file with the commissioner an agreement as provided in subdivision (2) of this subsection or (B) make payment to the commissioner as provided in subdivision (3) of this subsection. Any S corporation which timely files an agreement as provided in said subdivision (2) with respect to a nonresident shareholder for a taxable period shall be considered to have timely filed such an agreement for each subsequent taxable period. Any S corporation which does not timely file such an agreement for a taxable period shall not be precluded from timely filing such an agreement for subsequent taxable periods.

(2) An agreement under this subdivision shall be an agreement by a nonresident shareholder of the S corporation (A) to file a return in accordance with the provisions of this chapter and to make timely payment of all taxes imposed on the shareholder by this state with respect to the income of the S corporation and (B) to be subject to personal jurisdiction in this state for purposes of the collection of income taxes, together with related additions to tax, interest and penalties, imposed on the shareholder by this state with respect to the income of the S corporation. Such an agreement shall be considered to be timely filed for a taxable period and for all subsequent taxable periods if it is filed on or before the date the annual return for such taxable period is required to be filed pursuant to section 12-726. (3) Any payment under this subdivision shall be in an amount equal to the highest marginal tax rate in effect under section 12-700 multiplied by the subject shareholder's pro rata share of such corporation's separately computed items, as defined in Section 1366 of the Internal Revenue Code, AND THE AMOUNT OF SUCH SHAREHOLDER'S PRO RATA SHARE OF SUCH CORPORATION'S NONSEPARATELY COMPUTED ITEMS, AS DEFINED IN SECTION 1366 OF THE INTERNAL REVENUE CODE, REDUCED BY THE AMOUNT OF SUCH NONSEPARATELY COMPUTED ITEMS THAT ARE SUBJECT TO TAX UNDER CHAPTER 208 IN ACCORDANCE WITH SUBSECTION (c) OF SECTION 12-217, AS AMENDED BY SECTION 1 OF THIS ACT [4m, [0m derived from or connected with sources within this state as reflected on the S corporation's annual return for the taxable period. Any amount paid by an S corporation to this state with respect to any taxable period pursuant to this subdivision shall be considered to be a payment by the shareholder on account of the income tax imposed on the shareholder for such taxable period pursuant to this chapter. An S corporation shall be entitled to recover a payment made pursuant to this subdivision from the shareholder on whose behalf the payment was made. Any estimated tax installment shall be made on or before the due date of such installment pursuant to section 12-722, and any other payment for a taxable period shall be made at or before the date the annual return for such taxable period is required to be filed pursuant to section 12-726.

Sec. 5. This act shall take effect from its passage and shall be applicable to income years commencing on or after January 1, 1997.

Approved May 31, 1996. Effective May 31, 1996, and applicable as provided in section 5.

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