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

A partnership or S corporation doing business in Connecticut can make the Connecticut pass-through entity tax election each year by checking the box on a timely filed Form CT-1065/CT-1120SI. The election shifts state income tax from the owners to the business itself at a flat 6.99% rate, which lets the payment be deducted federally as a business expense rather than counted against each owner’s capped state and local tax deduction. Owners then receive a Connecticut credit equal to 87.5% of their share of the tax paid. For tax years starting in 2024 and later, the election is optional and must be actively chosen every year.

The federal SALT cap changed in 2025. New legislation raised it from $10,000 to $40,000, with a one percent annual bump that brings it to $40,400 for 2026. That higher cap phases back down toward $10,000 for filers with income above $505,000 in 2026. The Connecticut election still matters most for owners whose income puts them in that phase-down range.

Which Businesses Can Elect

Any entity treated as a partnership or an S corporation for federal tax purposes qualifies, provided it does business in Connecticut or earns Connecticut-sourced income. That covers general partnerships, limited partnerships, limited liability partnerships, and LLCs that have elected partnership or S corporation treatment on their federal returns.¹

Three categories fall outside the election. Publicly traded partnerships that file annual unitholder reports with the Department of Revenue Services cannot elect.² Single-member LLCs treated as disregarded entities for federal purposes are not eligible, because they are not taxed as partnerships or S corporations. And income flowing to C corporation or tax-exempt members is excluded from the PTE tax base under changes made in 2024.³

How to Make the Election

The election is made annually by checking the designated box on a timely filed Form CT-1065/CT-1120SI, Connecticut’s composite income tax return. That checkbox serves as the required written notice to the Commissioner of Revenue Services.³ The deadline is the due date of the return, including any granted extension.

Once made for a tax year, the election is irrevocable. It applies only to that year, so the entity must actively re-elect each year to keep the treatment in place. Because the choice binds every owner, entities with diverse ownership generally get sign-off from all members before filing.

The federal return comes first. The entity must complete federal Form 1065 (for partnerships) or Form 1120-S (for S corporations) before preparing the Connecticut return, since federal figures feed the state calculation. The electing entity then files Form CT-PET as its pass-through entity tax return.

What the Entity Pays

The tax rate is a flat 6.99%, applied to the entity’s Connecticut-related tax base.¹ For all electing entities beginning in 2024, the calculation uses the “alternative base” method; the former “standard base” option no longer exists.³

The alternative base is the sum of two pieces. First, modified Connecticut source income: the entity’s Connecticut-sourced income allocated to individual, trust, or estate members, after applying Connecticut’s personal income tax modifications to the federal figures. Second, the resident portion of unsourced income: the slice of total entity income not sourced to any state where the entity has nexus, weighted by the ownership percentage held by Connecticut residents.

Connecticut does not simply accept federal taxable income. The entity applies state-specific adjustments that mirror those required of individual taxpayers, including the addback of federal bonus depreciation for property placed in service after September 27, 2017.

What Owners Get Back

The entity pays the 6.99% tax, and each owner receives a Connecticut credit equal to 87.5% of their pro rata share of that tax.⁴ The entity reports each member’s credit allocation on Schedule CT K-1.

The remaining 12.5% is the built-in cost of the workaround. It generates no state credit for the owner. For owners in higher brackets whose federal deduction benefit is meaningful, this gap is usually small compared to the SALT savings. It is not a dollar-for-dollar swap.

For Connecticut residents, the credit is fully refundable. If it exceeds the owner’s Connecticut income tax liability, the state refunds the difference in the same year, so no carryforward is needed.

How the Federal Deduction Works

The reason the election exists is federal. IRS Notice 2020-75 confirmed that a pass-through entity’s payment of a state income tax imposed at the entity level is not treated as a separate deduction item on any partner’s or shareholder’s individual return.⁵ Instead, the tax reduces the entity’s net income before it flows through to owners.

Each owner’s Schedule K-1 shows lower income than it would without the election, and that reduction happens above the line for federal purposes. Owners are not claiming a state tax deduction on their individual returns and hitting the SALT cap; the business has already taken the deduction.

Nonresident Members and Composite Returns

Beginning with tax years starting in 2024, an electing entity must file a composite income tax return and pay Connecticut income tax on behalf of each nonresident noncorporate member (individuals, trusts, and estates) with Connecticut source income from the entity.⁶ Any PTE tax credit allocated to those nonresident members offsets the composite payment the entity makes for them.

A nonresident individual whose only Connecticut income comes from pass-through entities, and whose total from those entities is less than $1,000, does not have to file a separate Connecticut return. If the composite filing covers all of that member’s Connecticut-source income, no further filing or payment is required.⁶ A nonresident who also earns Connecticut income outside of pass-through entities must still file their own individual Connecticut return.

Deadlines, Estimated Payments, and Penalties

Form CT-PET is due by the fifteenth day of the third month after the entity’s tax year ends. For calendar-year filers, that is March 15. When the date falls on a weekend or legal holiday, the deadline moves to the next business day.²

Form CT-PET EXT extends the filing deadline to the fifteenth day of the ninth month after the close of the tax year, or September 15 for calendar-year filers. The extension covers filing only. Full payment is still due by the original March 15 deadline.

An electing entity whose expected annual PTE tax is $1,000 or more must make quarterly estimated payments. The required annual payment is the lesser of 90% of the current year’s liability or 100% of the prior year’s liability, as long as the prior year was a full twelve months with a filed return.⁷ For calendar-year entities, installments are due April 15, June 15, September 15, and January 15 of the following year, using Form CT-PET ES.

All PTE tax forms and payments must be submitted electronically through myconneCT or the MeF program. This covers Form CT-PET, Form CT-PET EXT, and estimated payment coupons. Missing the electronic-payment requirement triggers a penalty of 10% of the payment, capped at $2,500 for a first offense and $10,000 for a second offense, with no cap after the third. Tax not paid by the original due date accrues interest at 1% per month or fraction of a month, plus a flat 10% penalty on any amount not paid by that date.²

When the Election Actually Pays Off

The election is not automatic and it is not always beneficial. Whether it helps depends on each owner’s tax situation.

The clearest beneficiaries are owners with income above $505,000 in 2026, where the federal SALT cap begins phasing down from $40,400 back toward $10,000. For these owners, the entity-level deduction remains a real tax saver because the individual SALT deduction is still heavily restricted. An entity with several high-income partners who all itemize is the textbook case.

The math flips for owners whose total state and local taxes fall below the $40,400 cap. If an owner can already deduct the full SALT amount on their individual return, the election produces no federal benefit and the 12.5% credit gap increases their overall tax cost. Entities with a mix of resident and nonresident members, members in different brackets, or members who take the standard deduction instead of itemizing should model the numbers before checking the box.

Because the election is irrevocable once made for a tax year, the entity and all its owners are locked in until the next year’s return. That makes advance agreement among members the practical prerequisite, since the election affects every owner’s return regardless of whether it helps or hurts their individual position.

1
Justia Law. Connecticut General Statutes Title 12 Taxation 12-699
2
Connecticut State Department of Revenue Services. Pass-Through Entity Tax Information
3
State of Connecticut Department of Revenue Services. Pass-Through Entity Tax General Instructions 2024
4
Connecticut Department of Revenue Services. CT-1065/CT-1120SI Instructions
5
IRS. Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes
6
Connecticut State Department of Revenue Services. Composite Income Tax Information – Tax Information
7
Connecticut Department of Revenue Services. CT-PET ES 2025