Connecticut Corporation Business Tax

[Pages:10]Connecticut Corporation Business Tax

Presented by Department of Revenue Services October 2005

Connecticut Net Income

Federal taxable income + Connecticut Additions - Connecticut Subtractions = Connecticut Net Income

Apportionment

When a corporation does business in more than one state, Connecticut determines the percentage of business that should be "apportioned" to the state by creating a ratio: Ratio: business within the state business everywhere

Connecticut net income x ratio = Connecticut apportioned income.

Methods of Apportionment

Connecticut allows two basic methods of apportionment depending upon the type of business:

1) Three factor apportionment: payroll factor, property factor and sales factor (double weighted) ? 4 = apportionment percentage. Applied to: most corporations.

2) Single factor apportionment: corporation's in-state sales ? total sales = apportionment percentage. Applied to: financial service companies, manufacturers, and broadcasters.

If We Use 3 factors

Three factor: A manufacturer has the following:

Property factor

= 50%

Payroll factor

= 50%

Sales factor (30% x 2) = 60%

160 ? 4 = 40%

Total Connecticut net income is $1M.

$1M x 40% = $400,000

$400,000 x 7.5% = $30,000

If We Use Single Factor

Single factor: A manufacturer derives 30% of its sales from its business in Connecticut and 70% of its sales from business in Massachusetts and New York.

Total Connecticut net income is $1M. $1,000,000 x 30% = $300,000 $300,000 x 7.5% tax rate = $22,500 tax due

[Compare $ 30,000 to $ 22,500 = 25% decrease]

Benefits of Single Factor Apportionment

Generally, lower effective tax rate; Eliminates a direct tax increase for

creation of new jobs or plant expansion; Benefits in-state companies with large property and payroll that export products.

Effect of changes to the Apportionment Formula

CT companies that only operate in-state are not affected by changes in the apportionment formula;

CT companies with significant property and payroll and large out-of-state sales benefit significantly when Connecticut uses single factor only;

CT companies with small percentage of outof-state sales realize little benefit from single factor only;

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