Further Clarification of the Income Taxation of Nonresident Partners and S Corporation Shareholders
PURPOSE: This Special Notice clarifies how Form CT-1040NR/PY is to be completed by nonresident individuals who are partners or S corporation shareholders by answering questions that have arisen since the issuance of Form CT-1040NR/PY, Form CT-1065 and Form CT-1120SI.
EFFECTIVE DATE: Applicable to taxable years beginning on or after January 1, 1991.
STATUTORY AUTHORITY: 1991 Conn. Pub. Acts 3, §§51 to 93, inclusive (June Spec. Sess.) [hereinafter, "the Income Tax Act"], and the Temporary Income Tax Rules adopted under §92 thereof.
Q.1. How does a nonresident individual shareholder of an S corporation that is subject to the corporation business tax calculate his or her Connecticut income tax liability?
A.1. Like any other nonresident individual with Connecticut-sourced income, the shareholder begins by calculating his or her Connecticut liability as if he or she were a resident individual. This tentative tax liability is calculated as follows:
The shareholder adds to, or subtracts from, his or her federal adjusted gross income, the modifications entered on Form CT-1040NR/PY, Schedule 1, Lines 26 through 43. In determining the amounts to be entered on Line 28 or 39 (and except as noted below), the shareholder multiplies the S corporation ordinary income amount reported on his or her federal Form 1120S, Schedule K-1, Line 1 by the Connecticut apportionment fraction reported on his or her Form CT-1120SI, Schedule K-1 (NR), Line 22. This product must be:
entered on Form CT-1040NR/PY, Schedule 1, Line 39 (as a subtraction from federal adjusted gross income), if the amount reported on Form 1120S, Schedule K-1, Line 1 is more than zero.
entered on Form CT-1040NR/PY, Schedule 1, Line 28 (as an addition to federal adjusted gross income), if the amount reported on Form 1120S, Schedule K-1, Line 1 is less than zero. (To the extent that the loss included in computing federal adjusted gross is less than the amount reported on Form 1120S (e.g., because of federal at-risk rules), Schedule K-1, Line 1, the Connecticut apportionment fraction should be multiplied by the loss included in computing federal adjusted gross income, and not by the loss reported on Form 1120S, Schedule K-1.)
Generally, the tentative tax liability is multiplied by a fraction, the numerator of which is the amount entered on Line 6 of Form CT-1040NR/PY and the denominator of which is the amount entered on Line 5 of Form CT-1040NR/PY. (In entering separately stated items on Form CT-1040NR/PY, Schedule 1, Line 32 or 42, see SN 92 (5).)
Q.2. Is a corporate partner of a Connecticut partnership eligible to be included in a composite return?
Q.3. May a nonresident individual who is a partner or S corporation shareholder and who is included in a composite or group return file a Form CT-1040NR/PY in order to utilize the personal exemption under §53 of the Income Tax Act or personal credit under §54 of the Income Tax Act, or in order to offset his or her distributive or pro rata share of partnership or S corporation income or loss against other Connecticut-sourced income or loss?
A.3. Yes, but in doing so he or she must:
report on the Form CT-1040NR/PY all Connecticut-sourced income or loss (including income or loss reported on the composite or group return),
report on the Form CT-1040NR/PY as tax paid by him or her, the tax paid on his or her behalf with the composite or group return, and
- attach a copy of the first page of the composite or group return.
Q.4. Must a partnership that does not have a Connecticut tax registration number obtain such a number for Connecticut income tax purposes?
A.4. No, unless the partnership is otherwise required to obtain a Connecticut tax registration number as a result of being subject to another Connecticut tax (e.g., withholding tax).
Q.5. If a partnership or S corporation files a composite return, must a partner or shareholder file a Form CT-1040NR/PY?
A.5. No, as long as a partner or shareholder has no other Connecticut-sourced income.
Q.6. Is a partnership or S corporation filing a composite return required to furnish a Form CT-1065, Schedule K-1 (NR) or Form CT-1120SI, Schedule K-1 (NR) to a partner or shareholder who is included in such return?
A.6. Yes. A partner or shareholder who is included in a composite return must be furnished the same information in the same manner as a partner or shareholder who is not included in a composite return.
Q.7. If a partnership or S corporation has losses only, must it file a composite return in order for the partner or shareholder to use such losses in the future?
A.7. The Form CT-1065 or Form CT-1120SI (and all required schedules and attachments) must be filed. However, Schedules A and E of Form CT-1065 or Schedules A and B of Form CT-1120SI need not be completed unless required to indicate estimated income tax payments that have been made.
Q.8. Must a partnership file a Form CT-1065 for an accounting period commencing before January 1, 1991?
A.8. No. E.g., a fiscal year partnership whose accounting period, for federal income tax purposes, commences during 1990 is not required to file a Form CT-1065. However, the partnership must supply any of its calendar year partners with sufficient partnership income information to enable a partner to file his or her Connecticut income tax return.
Q.9. If a partnership (Partnership A) is itself a partner in another partnership (Partnership B), what are the filing requirements?
A.9. Partnership B is required to file a Form CT-1065 and to furnish a Form CT-1065, Schedule K-1 or Schedule K-1 (NR), as the case may be, to its partners (including Partnership A), if it has Connecticut-sourced income or resident individual partner(s). In such event, Partnership B's nonresident individual partners must file a Form CT-1NA or be included in a composite return. The same rules apply to Partnership A.
Q.10. Would interest income from a working capital checking or savings account of a partnership carrying on business in Connecticut or from an escrow account of a partnership owning rental property in Connecticut be considered Connecticut-sourced income?
A.10. Yes. See Temporary Income Tax Rule 62 (b) -5 (b).
Q.11. Do the federal at-risk rules and basis limitation rules apply for Connecticut income tax purposes?
Q.12. Do the federal passive loss limitation rules apply for Connecticut income tax purposes?
A.12. For resident individuals, deductions of passive losses must be computed as they are computed for federal income tax purposes.
For nonresident individuals, deductions of passive losses must be computed as they would be computed for federal income tax purposes if the Connecticut items of income, gain, loss and deduction were the only items making up the corresponding federal items of income, gain, loss and deduction. No suspended loss that was incurred in a taxable year beginning before January 1, 1991 may be carried forward to a succeeding taxable year.
Q.13. Must a partnership with no Connecticut-sourced income furnish a Form CT-1065, Schedule K-1 (NR) to its nonresident individual partners?
A.13. No, but it must furnish a Form CT-1065, Schedule K-1 to its resident individual partners.
EFFECT ON OTHER DOCUMENTS: The instructions for Form CT-1040NR/PY, Form CT-1065 and Form CT-2210SI are amplified.
PLEASE NOTE THE FOLLOWING NEW INFORMATION ABOUT DRS.
FOR FURTHER INFORMATION: To order forms and publications or for further information, call the Department of Revenue Services at 860-297-5962 (Hartford area or out-of-state) or 1-800-382-9463 (in-state). Forms and publications may be ordered through voice-mail 24-hours a day by choosing Option 3 on your touch tone telephone.
Electronic Delivery Options: You can also obtain tax forms and publications 24-hours a day from our Web home page at http://www.ct.gov/drs. Telecommunications Device for the Deaf (TDD/TT) users only call 860-297-4911 during business hours.