Connecticut Pass-Through Entity Tax: Election, Calculation, and Credits

The Connecticut pass-through entity tax is an elective state tax that partnerships and S corporations can pay at the entity level at a flat 6.99% of Connecticut-sourced income, giving owners a refundable credit on their personal Connecticut return for their share of what the entity paid.¹ For tax years beginning in 2024 and later, the tax is elective rather than mandatory, so an entity has to opt in each year it wants the treatment.²

Why Elect the PTET at All

The point of the election is federal, not state. The federal SALT deduction cap, originally $10,000 under the 2017 Tax Cuts and Jobs Act and raised to $40,000 starting in 2025, limits what individuals can deduct for state and local taxes on their federal return. Owners of profitable Connecticut businesses blow through that ceiling quickly on their personal income tax alone. When the entity pays the Connecticut tax instead, that payment is an ordinary business expense on the entity’s federal return with no dollar cap.

The IRS confirmed this treatment in Notice 2020-75, which states that state-imposed income taxes paid by partnerships and S corporations are deductible by the entity and do not count against any individual partner’s or shareholder’s SALT cap.³ The 6.99% paid by the entity reduces the income that flows through on K-1s, so federal tax drops by roughly the amount of Connecticut tax paid. On the state side, the owners get a refundable credit for the same amount, so they aren’t taxed twice in Connecticut.

Who Can Elect

Any entity treated as a partnership or S corporation for federal income tax purposes can elect the Connecticut PTET. That covers general partnerships, limited partnerships, limited liability partnerships, and LLCs taxed as partnerships or S corporations.⁴ The entity must either do business in Connecticut or have Connecticut-sourced income. A substantial economic presence counts as doing business even without a physical office.²

Federal classification is what controls, not where the entity was formed. A Delaware LLC taxed as an S corporation with Connecticut-sourced income qualifies the same as a Connecticut partnership. Entities exempt from federal income tax and publicly traded partnerships generally fall outside the PTET.

How to Make the Election

The election is annual. To elect for a given year, the entity must give written notice to the Commissioner of Revenue Services no later than the due date of the return, including extensions. In practice, that notice is given by checking the election box on a timely filed Form CT-1065/CT-1120SI, which the Department of Revenue Services treats as sufficient.²

Once made, the election is irrevocable for that year. You cannot amend a return to add the election later, and you cannot undo it once the box is checked.⁵ Because the choice resets every year, an entity can simply decline to elect in a future year if the math no longer works for its owners.

How the Tax Is Calculated

The 6.99% rate applies to the entity’s Connecticut-sourced income base. For tax years beginning in 2024 and later, entities electing the PTET must use the Alternative Base: modified Connecticut source income plus the resident portion of unsourced income, with income passed through to corporate members excluded.¹ The practical effect is that income flowing to Connecticut residents that can’t be sourced to a specific state gets pulled into the base, which raises the entity tax but also raises the credit those residents receive.

The calculation starts with federal ordinary business income or loss, then applies Connecticut modifications. Common additions include net interest income excluded from federal gross income and any state or local income taxes deducted on the federal return. Common subtractions include income from U.S. government obligations and amounts taxable federally but exempt from Connecticut tax.

Multi-state entities apportion the modified income to Connecticut using the formula in Connecticut General Statutes Section 12-218.⁶ Most non-manufacturing entities use a single sales factor. Sales of tangible goods are sourced to Connecticut when delivered to a buyer in the state, and service revenue is sourced based on where the benefit is received or where the income-producing activity occurs. Multiply the Connecticut-apportioned income by 6.99% to get the gross PTET liability.

Filing Deadlines and Estimated Payments

Every pass-through entity doing business in Connecticut or with Connecticut-sourced income has to file Form CT-1065/CT-1120SI, the Connecticut Composite Income Tax Return, regardless of income amount.⁵ Entities electing the PTET use the same form and check the election box. All returns and payments go through the DRS Taxpayer Service Center electronically.

The return is due the fifteenth day of the third month after the close of the entity’s tax year. Calendar-year entities file by March 15. A six-month extension to September 15 is available by filing Form CT-1065/CT-1120SI EXT on or before the original due date.⁷ The extension covers filing only. Any tax owed is still due on the original date, and unpaid balances start accruing interest from there.

Entities expecting a PTET liability of $1,000 or more have to make quarterly estimated payments. The required annual payment is the lesser of 90% of the current year’s tax or 100% of the prior year’s tax, with the prior-year safe harbor only available if the entity filed a return for a full twelve-month prior year. Using the prior-year method, the cumulative installments are:²

April 15: 25% of prior year tax
June 15: 50% cumulative
September 15: 75% cumulative
January 15: 100% cumulative

Using the current-year method, the cumulative targets are 22.5%, 45%, 67.5%, and 90% on the same dates. Estimated payments are reconciled against the final liability when the annual return is filed, and overpayments can be credited to next year’s estimates or refunded.

Penalties for Missing a Deadline

Interest runs at 1% per month, or any fraction of a month, on any PTET balance unpaid after the original due date, whether the entity filed on time with a short payment or filed late.⁸ Separate penalties can stack on top of that interest:

Late payment or underpayment: 10% of the tax not paid by the original due date.
Failure to file where the Commissioner prepares a return on the entity’s behalf: 10% of the balance due or $50, whichever is greater.
Late filing with no tax due: up to $50 at the Commissioner’s discretion.
Willful failure to file or pay: a fine of up to $1,000 or up to one year of imprisonment, in addition to other penalties.

These penalties apply to the composite return obligations as well as to the PTET itself.⁵ An entity that pays six months late is looking at both the accumulated monthly interest and the flat 10% penalty on the unpaid amount.

The Owner Credit

Once the entity pays the PTET, each owner gets a proportionate share reported on Schedule CT K-1. Connecticut resident owners claim it on Form CT-1040 using Schedule CT-PE. The credit lands on Line 20c, grouped with payments and refundable credits rather than with non-refundable credits.⁹

Refundability is the piece that matters most. Any PTET credit exceeding the owner’s Connecticut income tax liability comes back as a refund. If your share of the PTET is $15,000 and your Connecticut income tax after other credits is $11,000, you get the $4,000 difference.¹⁰ You never pay more Connecticut tax overall because the entity elected.

Check that the credit on your Schedule CT K-1 matches what you claim on your personal return. The entity computes and reports each owner’s share, and mismatches between the K-1 and the individual return are a common audit trigger.

Non-Resident Owners

Connecticut requires every pass-through entity to make composite income tax payments for its non-resident individual members, non-resident trusts and estates, and members that are themselves pass-through entities.⁵ When the entity handles that composite payment and filing, a non-resident whose only Connecticut income comes from the entity does not need to file a separate Connecticut return. If the entity does not remit on a non-resident member’s behalf, that member files Form CT-1040NR/PY on their own.¹¹

The PTET credit itself flows to non-residents the same way it flows to residents: through Schedule CT K-1, offsetting Connecticut liability. The composite return just decides who does the paperwork. Non-resident owners should also check whether their home state gives credit for Connecticut PTET paid on their behalf. Many do, but the rules vary by state and not every state has fully caught up with entity-level taxes.

1
CT.gov. OCG-6 Regarding the Calculation of the Pass-Through Entity Tax
2
CT.gov. Pass-Through Entity Tax Information
3
IRS. Notice 2020-75
4
CT.gov. Form CT-1065/CT-1120SI Instructions
5
CT.gov. Composite Income Tax Information
6
Justia. Connecticut Code Title 12 Chapter 208 – Section 12-218
7
CT.gov. Form CT-1065/CT-1120SI EXT – Application for Extension of Time to File
8
Justia. Connecticut Code Title 12 Chapter 229 – Section 12-735
9
CT.gov. 2024 Form CT-1040 Connecticut Resident Income Tax Return Instructions
10
CT.gov. Form CT-1040 Connecticut Resident Income Tax Return 2024
11
CT.gov. Nonresident and Part-Year Resident Tax Information