Morning: Small Business Tax Tips (New Haven): The Connecticut Pass-Through Entity Tax — How New Haven LLC and S-Corp Owners Get Around the SALT Cap

October 2, 2026 • News

New Haven, Connecticut, Jose’s Tax Service, October 2, 2026

New Haven business owners operating through partnerships, LLCs taxed as partnerships, and S corporations should review Connecticut’s optional Pass-Through Entity Tax (PET) before the 2026 filing season.

The PET can shift Connecticut income tax from the individual owner to the business entity. That treatment may create a federal business deduction that is not limited by the individual federal state and local tax (SALT) deduction cap.

The election is technical. It is not automatically beneficial for every owner. Model the numbers before making an irrevocable election.

Why the SALT Cap Matters!

For the 2026 tax year, the federal SALT deduction cap is:

$40,400 for most individual filers.
$20,200 for married taxpayers filing separately.
The cap begins to phase down when modified adjusted gross income (MAGI) exceeds $505,000 for most filers.
The phase-down threshold is $252,500 for married taxpayers filing separately.
The cap is reduced by 30 cents for every dollar above the applicable threshold.
The cap cannot fall below $10,000, or $5,000 for married taxpayers filing separately.

The individual SALT limitation generally applies to itemized deductions reported on a federal individual income tax return. It can include state income taxes, local income taxes, and property taxes.

A pass-through entity’s properly reported business tax deduction is treated differently. When Connecticut PET is paid by an eligible entity, the deduction is taken at the entity level. It is not treated as the owner’s individual SALT itemized deduction.

Review the IRS explanation of the SALT deduction and the entity’s full federal reporting before relying on this strategy.

What Is Connecticut PET?

Connecticut PET is an optional annual election available to eligible pass-through entities, including:

Partnerships.
LLCs taxed as partnerships.
S corporations.
Other qualifying pass-through structures with Connecticut-sourced income.

The tax is generally calculated at 6.99% of the entity’s Connecticut-sourced income. Owners receive a Connecticut income tax credit equal to 87.5% of their pro-rata share of the PET paid by the entity.

The election is made by checking the designated Pass-Through Entity Tax box on a timely filed Form CT-1065/CT-1120SI, Connecticut Composite Income Tax Return.

The election is:

Annual.
Optional.
Irrevocable for that tax year.
Not available for retroactive selection through a later amended return if the original election was not properly made.

Read the current Connecticut Department of Revenue Services (DRS) Pass-Through Entity Tax Information before filing.

How the PET Strategy Works!

The structure has three primary steps:

The pass-through entity calculates its Connecticut-sourced income.
The entity pays Connecticut PET at 6.99%.
The owners receive an 87.5% Connecticut income tax credit based on their pro-rata shares.

Because the tax is paid by the entity, the entity’s federal taxable income is reduced by the deductible state tax payment, subject to proper federal treatment and reporting.

The individual owner then receives the Connecticut credit on the applicable Connecticut filing. The credit is designed to restore most of the Connecticut tax at the owner level.

This is not a tax-free result. The entity pays the tax. The benefit comes from moving the deduction from the owner’s capped individual SALT deduction to the entity’s business deduction.

Worked Example: $400,000 of Connecticut-Sourced Income!

Assume a New Haven LLC taxed as a partnership has:

$400,000 of Connecticut-sourced net income.
Two individual owners.
Equal 50% ownership.
No special Connecticut modifications in this simplified example.
A valid 2026 PET election.

Entity-level calculation

The estimated PET is:

$400,000 × 6.99% = $27,960 PET

The entity pays the $27,960 tax to Connecticut. That payment is reported at the entity level and may reduce federal taxable income by $27,960, assuming the deduction is properly reported under applicable federal rules.

Owner-level credit

The total Connecticut credit is:

$27,960 × 87.5% = $24,465 credit

With two equal owners:

Owner One receives an estimated $12,232.50 credit.
Owner Two receives an estimated $12,232.50 credit.

The actual credit must be calculated using the applicable Form CT-PET schedules, member information, Connecticut-source percentages, and any required modifications. The credit may be refundable to qualifying individual owners, but the filing result depends on the owner’s facts and Connecticut return.

The federal benefit also depends on the owner’s marginal federal tax rate, whether the owner itemizes, and whether other limitations apply. For that reason, do not compare the $27,960 payment directly with a dollar-for-dollar federal refund.

File the Correct Forms by the Correct Deadline!

Calendar-year entities must address the 2026 PET election and filing requirements before March 15, 2027.

Complete these actions:

File Form CT-1065/CT-1120SI on time.
Check the designated PET election box. A timely filed return serves as the required written notice of the election.
File Form CT-PET, Connecticut Pass-Through Entity Tax Return.
Use the correct tax-year form. DRS forms are year-specific. Using an incorrect form can delay processing.
Prepare owner-level Connecticut reporting.
Provide each owner with the applicable Connecticut Schedule CT K-1 information and credit amount.
Pay the PET balance.
An extension to file does not automatically extend the time to pay. Late payment may result in penalties and interest.

Review the Form CT-PET instructions and Form CT-1065/CT-1120SI instructions when preparing the return.

Follow the Estimated PET Payment Calendar!

An entity with PET liability of $1,000 or more must generally make quarterly estimated PET payments.

For a calendar-year entity, the payment dates are:

April 15, 2026
June 15, 2026
September 15, 2026
January 15, 2027

The fourth payment is due January 15, 2027, before the March 15, 2027 return deadline.

The required annual payment generally follows the lesser of:

90% of the current-year PET liability; or
100% of the prior-year PET liability, when the prior year qualifies under the DRS rules.

Use Form CT-PET ES, Estimated Connecticut Pass-Through Entity Tax Payment Coupon, and make required electronic payments through myconneCT.

Late payment can result in a 10% penalty. Interest may also apply at 1% per month or fraction of a month until the balance is paid.

Who Should Not Elect Without Modeling the Numbers!

The PET election does not benefit every New Haven business owner. Review the following issues before electing:

Low Connecticut tax liability: An owner with limited Connecticut tax may not receive the expected value from the credit structure.
Alternative minimum tax (AMT) exposure: Federal AMT calculations may affect the value of state tax deductions. Model the federal result rather than assuming a benefit.
Nonresident owners: Review each nonresident owner’s Connecticut-source income, composite tax treatment, and credit allocation.
Part-year residents: Allocate income and credits carefully between residency periods.
Unequal ownership: Do not divide the PET equally unless the operating agreement, tax allocation, and Connecticut distributive shares support that treatment.
Multistate operations: Use proper Connecticut sourcing and apportionment. Revenue from services, tangible property, rentals, and other activities may require different sourcing analysis.
Cash-flow limitations: PET creates an entity-level payment obligation. The credit may be reported later than the entity’s payment date.

Use the current Form CT-PET worksheets and supporting schedules. Do not make the election based only on the 6.99% rate.

Complete This Checklist Before March 15, 2027!

Before finalizing a 2026 election, complete these steps:

Confirm eligibility. Verify that the entity is a partnership, qualifying LLC, S corporation, or other eligible pass-through entity with Connecticut business activity or Connecticut-sourced income.
Calculate Connecticut-sourced income. Reconcile federal Form 1065 or Form 1120S with Connecticut modifications, sourcing, apportionment, and member percentages.
Model both outcomes. Compare the individual SALT deduction result with the entity-level PET deduction and 87.5% owner credit.
Review every owner. Identify resident, nonresident, part-year, corporate, and pass-through owners. Confirm each owner’s pro-rata share.
Schedule estimated payments. Confirm whether the entity’s PET liability is $1,000 or more. Pay remaining estimates on January 15, 2027, and retain electronic confirmations.
File the election correctly. Check the PET box on a timely filed Form CT-1065/CT-1120SI. Then file Form CT-PET and provide accurate credit information to each owner.

Schedule a New Haven PET Review!

Connecticut PET is a sophisticated tax planning decision. The election may reduce federal taxable income while restoring most of the Connecticut tax through the owner credit. However, the election is irrevocable for the year and must be supported by accurate sourcing, ownership, and filing information.

Jose’s Tax Service provides personalized small business tax preparation, New Haven taxes guidance, federal and Connecticut e-filing, bookkeeping support, and year-round tax planning for LLC and S-corporation owners.

Schedule a no-cost consultation with Jose’s Tax Service before March 15, 2027. Same-day appointments may be available. Choose a virtual appointment or meet with us in person in New Haven.

Contact Jose’s Tax Service or schedule a tax appointment online. You may also call (475) 254-9373.

Practical reminder: Do not check the PET election box until the entity’s federal and Connecticut numbers have been reviewed. An incorrect or late election can delay processing, reduce the expected tax strategy benefit, or create avoidable penalties.

Category: Tax Planning | Tags: small business tax, New Haven business, deductions, tax strategy