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Report: State financiers latching onto tax workaround

September 21, 2018

Under a new Connecticut law passed earlier this year, top hedge fund managers and other financiers could reap millions of dollars in tax savings, according to a Bloomberg analysis Thursday of a little-noticed element in the state statute.

In June, Gov. Dannel P. Malloy signed into law a new tax treatment for pass-through entities like limited liability companies and partnerships, under which taxes on profits are assessed directly on individuals controlling those firms so that they do not get taxed twice.

Under the new law, owners of those companies get a credit of 93 percent of the income taxes they pay the state, while being able to take a full deduction of the tax as a business expense for the purpose of reporting their federal returns to the IRS. And for fund managers who claim a 20 percent tax rate after cashing in investments they have held for three years, one accounting method can reduce their long-term capital gains rate by 1.4 percentage points, according tot he Bloomberg report.

According to several accounting experts queried by Bloomberg, the Connecticut provision has not gone unnoticed among the wealthiest money management firms and their bookkeepers, with New York residents who work in Connecticut not being able to grab the same benefit. Connecticut is third nationally for the concentration of households with at least $1 million in investable assets, at 107,000 in all or one of every 7.8 percent of households, as calculated by Phoenix Marketing International in its annual ranking of millionaire households.

Finn Dixon & Herling partner Michael Spiro told Bloomberg the IRS could yet issue a clarification barring the tax break.

The IRS already intervened earlier this year after Connecticut and other states explored creating a way to restore the benefits lost by residents after the December passage of the federal Tax Cuts and Jobs Act, which among other measures capped at $10,000 the IRS deductions taxpayers could take for the state and local taxes they pay, or SALT.

Connecticut, New York and other northeast states have since sued the federal government, with the Malloy administration estimating Connecticut residents will lose $10.8 billion in SALT deductions they could have claimed on this year’s taxes.

In August, income tax and pass-through entity tax collections were up 13.8 percent in Connecticut from a year earlier, according to the state Department of Revenue Services, representing an additional $55 million in revenue, with sales tax collections jumping more than 6 percent. The two taxes drive DRS collections, amounting to 80 cents of every dollar that taxpayers sent to Hartford in August.

Alex.Soule@scni.com; 203-842-2545; @casoulman

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