State and Local Tax Update: CT, NJ and MA Budgets and CA Pass-Through Entity Tax Changes

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While Connecticut, New Jersey and Massachusetts enacted their fiscal year budgets and additional legislation that includes notable changes affecting businesses and individuals, California enacted a significant change to its Pass-Through Entity Tax (PTET). The key changes are detailed below.

Connecticut

Corporate Income Tax

• The scheduled phase-out of the capital base tax has been accelerated, eliminating it by January 1, 2026, two years earlier than planned.
• The 10% corporate tax surcharge has been extended through the 2028 income year.
• The $2.5 million Unitary Reporting Cap on combined unitary reporting has been eliminated, aligning Connecticut with other states’ practices.
• The Research & Development Credit exchange rate for biotech companies has increased from 65% to 90%, providing greater incentives for innovation in this sector.
• New Operating Loss Rules:
  • Applicable to income tax years commencing on or after January 1, 2025, a combined group may elect to relinquish 50% of its unused operating losses incurred prior to the income year commencing on or after January 1, 2015, and before January 1, 2016, and may utilize three-fourths for income years commencing prior to January 1, 2025 three-fourths the remaining operating loss carryover without regard to certain statutory limitations. The portion of the operating loss carryover that may be deducted will be limited to the amount required to reduce a combined group’s tax, prior to surtax and the application of credits, to $2.5 million in any income year commencing on or after January 1, 2015, and prior to January 1, 2025.
  • Any combined group that made the election must recalculate its remaining operating loss carryover on the return it files for the income year commencing on or after January 1, 2025, and prior to January 1, 2026, as if it had not been required to relinquish 50% of its unused Net Operating Loss (NOL) carryover to make the election. The recalculated remaining operating losses may be utilized in income years commencing on or after January 1, 2025, including, but not limited to, the limitation prescribed in Gen. Stat. 12-217(4)(A)(ii) and the statutorily prescribed period of time based upon when such losses were incurred, to claim the deductions.
  • For income years beginning prior to January 1, 2025, in no event will the tax calculated for a combined group on a combined unitary basis, prior to surtax and application of credits, exceed the nexus combined base tax by more than $2.5 million.
  • The legislation exempts corporation business taxpayers from interest on estimated tax because of changes to the NOL provisions under the bill.

Personal Income Tax

• The Property Tax Credit increased from $300 to $350, and eligibility expanded for Single filers with adjusted gross income up to $70,000 phasing out completely and Joint filers up to $100,000 qualify for the full credit and phasing out completely for Single filers with AGI over $130,000 and Joint filers over $160,000.
• Eligible families receiving the Earned Income Tax Credit Supplement will receive an additional $250 per child annually.
• The Workforce Housing Opportunity Development Tax Credit and UConn Research Incentive Tax Credit become effective for tax years beginning on or after January 1, 2025.
• The creation of a 60% state personal income tax credit for Connecticut residents who successfully contest another state’s taxation of income earned while working remotely from Connecticut and is retroactive to tax years beginning on or after January 1, 2020.
• The Human Capital Investment Credit for investments in childcare facilities and worker subsidies has increased from 5% to 25%, allowing corporations to offset up to 70% of their business tax liability.

New Jersey

Corporate Income Tax

• There is an increase in the net global intangible low-taxed income (GILTI) deduction to 95% by classifying GILTI as a dividend.
• Changes to the combined reporting rules.
• Adoption of the “Finnigan” sourcing method.
• Creation of a limited exception for decoupling from IRC Section 174.
• Modification of the dividends received deduction and NOL calculations.
• Prospectively incorporate parts of, and expands on, the 2021 Multistate Tax Commission’s updated guidelines on P.L. 86-272.

Personal Income Tax

• The Veterans’ Exemption has been extended and surviving spouses of deceased veterans can now claim the $6,000 gross income tax exemption.
• Direct property tax relief is available for senior homeowners (65+) with the new Stay NJ Program, with incomes under $500,000 a property tax credit equal to 50% of their property tax bill, up to $6,500 annually along with continuation of the ANCHOR Program and Senior Freeze Program.
• A capital gains tax exclusion for Qualified Small Business Stock, aligning with federal Section 1202 provisions (with the OBBBA changes) allowing eligible investors who hold qualifying stock for at least five years to exclude gains from state income tax upon sale.

Miscellaneous Taxes

• Introduction of the new “Mansion Tax” on property sales over $2 million, starting at 2% and increasing incrementally, capping at 3.5% for properties over $3.5 million payable by the seller.
• Online gambling and sports betting tax rates increased to 19.75%, up from 15% and 13%, respectively.
• Cigarette taxes increased by over 10% from $2.70 to $3 per pack, and vape product taxes increased by up to 200% from 10 cents per fluid milliliter to 30 cents.

Massachusetts

Business Tax

• Amended regulations were issued to clarify that effective for tax years beginning on or after January 1, 2025, all pass-through entities and corporations are required to use singles sales factor apportionment unless the new “inapplicable rules” (described below) apply.
  • The inapplicable rule applies when a company’s numerator and denominator of its sales factor are both zero, the denominator is less than 10% of one-third of taxable income, or the Massachusetts Department of Revenue determines its insignificant in the production of income.
  • If an entity’s sales factor is inapplicable, then a two-factor property and payroll apportionment methodology is required.

Personal Income Tax

• Apart from a few exceptions listed below, effective for tax years beginning on or after January 1, 2024, married individuals who file a joint federal return must file a Massachusetts joint return.
• The exceptions are:
  • The married individual’s tax years do not begin on the same day;
  • The married individual’s tax years do not end on the same day except where such tax years end on different days solely because of the death of either or both;
  • Either married individual is not required to file a return;
  • One or both married individuals is a nonresident and has items of income, exemptions, or deductions unrelated to their Massachusetts income;
  • If only one of the married individuals is a nonresident, the sum of the resident married individual’s Massachusetts gross income and the nonresident married individual’s Massachusetts source income does not exceed the threshold; or
  • If both of the married individuals are nonresidents, the married individuals’ combined Massachusetts source income.

California

Business Tax

• For tax years beginning on or after January 1, 2026 and before January 1, 2031, rather than disqualifying a pass-through entity for insufficient initial payments (due on June 15 of the tax year at issue), the pass-through entity tax credit passed through to the shareholder/partners/members is reduced by an amount equal to 12.5% of the qualified taxpayer’s pro rata share of the required amount due but not paid. 

Contact Us

If you have questions related to these changes or need assistance with state tax issues generally, contact your client engagement partner or:

Steven J. Eller, CPA, JD
Partner
seller@pkfod.com

Nicholas Rochedieu, JD
Partner
nrochedieu@pkfod.com

Jill Cantor, CPA, JD
Director
jcantor@pkfod.com