Sec. 12-217. Deductions from gross income. Net income of S corporations. Regulations.
Sec. 12-217. Deductions from gross income. Net income of S corporations.
Regulations. (a)(1) In arriving at net income as defined in section 12-213, whether or
not the taxpayer is taxable under the federal corporation net income tax, there shall be
deducted from gross income, (A) all items deductible under the Internal Revenue Code
effective and in force on the last day of the income year except (i) any taxes imposed
under the provisions of this chapter which are paid or accrued in the income year and
in the income year commencing January 1, 1989, and thereafter, any taxes in any state
of the United States or any political subdivision of such state, or the District of Columbia,
imposed on or measured by the income or profits of a corporation which are paid or
accrued in the income year, and (ii) deductions for depreciation, which shall be allowed
as provided in subsection (b) of this section, and (B) additionally, in the case of a regulated investment company, the sum of (i) the exempt-interest dividends, as defined in
the Internal Revenue Code, and (ii) expenses, bond premium, and interest related to tax-exempt income that are disallowed as deductions under the Internal Revenue Code, and
(C) in the case of a taxpayer maintaining an international banking facility as defined in
the laws of the United States or the regulations of the Board of Governors of the Federal
Reserve System, as either may be amended from time to time, the gross income attributable to the international banking facility, provided, no expense or loss attributable to
the international banking facility shall be a deduction under any provision of this section,
and (D) additionally, in the case of all taxpayers, all dividends as defined in the Internal
Revenue Code effective and in force on the last day of the income year not otherwise
deducted from gross income, including dividends received from a DISC or former DISC
as defined in Section 992 of the Internal Revenue Code and dividends deemed to have
been distributed by a DISC or former DISC as provided in Section 995 of said Internal
Revenue Code, other than thirty per cent of dividends received from a domestic corporation in which the taxpayer owns less than twenty per cent of the total voting power and
value of the stock of such corporation, and (E) additionally, in the case of all taxpayers,
the value of any capital gain realized from the sale of any land, or interest in land, to
the state, any political subdivision of the state, or to any nonprofit land conservation
organization where such land is to be permanently preserved as protected open space
or to a water company, as defined in section 25-32a, where such land is to be permanently
preserved as protected open space or as Class I or Class II water company land.
(2) No deduction shall be allowed for (A) expenses related to dividends which are
allowable as a deduction or credit under the Internal Revenue Code and (B) federal taxes
on income or profits, losses of other calendar or fiscal years, retroactive to include all
calendar or fiscal years beginning after January 1, 1935, interest received from federal,
state and local government securities, if any such deductions are allowed by the federal
government.
(3) Notwithstanding any provision of this section to the contrary, no dividend received from a real estate investment trust shall be deductible under this section by the
recipient unless the dividend is: (A) Deductible under Section 243 of the Internal Revenue Code; or (B) received by a qualified dividend recipient from a qualified real estate
investment trust and, as of the last day of the period for which such dividend is paid,
persons, not including the qualified dividend recipient or any person that is either a
related person to, or an employee or director of, the qualified dividend recipient, have
outstanding cash capital contributions to the qualified real estate investment trust that,
in the aggregate, exceed five per cent of the fair market value of the aggregate real estate
assets, valued as of the last day of the period for which such dividend is paid, then held
by the qualified real estate investment trust. For purposes of this section, a "related
person" is as defined in subdivision (7) of subsection (a) of section 12-217m, "real estate
assets" is as defined in Section 856 of the Internal Revenue Code, a "qualified dividend
recipient" means a dividend recipient who has invested in a qualified real estate investment trust prior to April 1, 1997, and a "qualified real estate investment trust" means
an entity that both was incorporated and had contributed to it a minimum of five hundred
million dollars worth of real estate assets prior to April 1, 1997, and that elects to be a
real estate investment trust under Section 856 of the Internal Revenue Code prior to
April 1, 1998.
(4) Notwithstanding anything in this section to the contrary, (A) any excess of the
deductions provided in this section for any income year commencing on or after January
1, 1973, over the gross income for such year or the amount of such excess apportioned
to this state under the provisions of section 12-218, shall be an operating loss of such
income year and shall be deductible as an operating loss carry-over for operating losses
incurred prior to income years commencing January 1, 2000, in each of the five income
years following such loss year, and for operating losses incurred in income years commencing on or after January 1, 2000, in each of the twenty income years following such
loss year, provided the portion of such operating loss which may be deducted as an
operating loss carry-over in any income year following such loss year shall be limited
to the lesser of (i) any net income greater than zero of such income year following such
loss year, or in the case of a company entitled to apportion its net income under the
provisions of section 12-218, the amount of such net income which is apportioned to
this state pursuant thereto, or (ii) the excess, if any, of such operating loss over the total
of such net income for each of any prior income years following such loss year, such
net income of each of such prior income years following such loss year for such purposes
being computed without regard to any operating loss carry-over from such loss year
allowed by this subparagraph and being regarded as not less than zero, and provided,
further, the operating loss of any income year shall be deducted in any subsequent year,
to the extent available therefor, before the operating loss of any subsequent income year
is deducted, and (B) any net capital loss, as defined in the Internal Revenue Code effective and in force on the last day of the income year, for any income year commencing
on or after January 1, 1973, shall be allowed as a capital loss carry-over to reduce, but
not below zero, any net capital gain, as so defined, in each of the five following income
years, in order of sequence, to the extent not exhausted by the net capital gain of any
of the preceding of such five following income years, and (C) any net capital losses
allowed and carried forward from prior years to income years beginning on or after
January 1, 1973, for federal income tax purposes by companies entitled to a deduction
for dividends paid under the Internal Revenue Code other than companies subject to
the gross earnings taxes imposed under chapters 211 and 212, shall be allowed as a
capital loss carry-over.
(5) This section shall not apply to a life insurance company as defined in the Internal
Revenue Code effective and in force on the last day of the income year. For purposes of
this section, the unpaid loss reserve adjustment required for nonlife insurance companies
under the provisions of Section 832(b)(5) of the Internal Revenue Code of 1986, or any
subsequent corresponding internal revenue code of the United States, as from time to
time amended, shall be applied without making the adjustment in Subparagraph (B) of
said Section 832(b)(5).
(b) For purposes of determining net income under this section, the deduction allowed for depreciation shall be determined as provided under the Internal Revenue Code
of 1986, or any subsequent corresponding internal revenue code of the United States,
as from time to time amended, provided in making such determination, the provisions
of Section 168(k) of said code shall not apply.
(c) (1) Notwithstanding the provisions of subsections (a) and (b) of this section,
"net income", in the case of an S corporation, means the percentage of the nonseparately
computed income or loss, as defined in Section 1366(a)(2) of the Internal Revenue Code,
of such S corporation, without separate state adjustment pursuant to section 12-233 or
12-226a for the compensation of any officer or employee, to which shall be added (A)
any taxes imposed under the provisions of this chapter which are paid or accrued in the
income year and (B) any taxes in any state of the United States or any political subdivision of such state, or the District of Columbia, imposed on or measured by the income
or profits of a corporation which are paid or accrued in the income year as provided in
subdivision (2) of this subsection.
(2) For income years commencing prior to January 1, 1997, "net income" means
one hundred per cent of the amount computed under subdivision (1) of this subsection;
for income years commencing on or after January 1, 1997, and prior to January 1, 1998,
"net income" means ninety per cent of the amount computed under subdivision (1) of
this subsection; for income years commencing on or after January 1, 1998, and prior to
January 1, 1999, "net income" means seventy-five per cent of the amount computed
under subdivision (1) of this subsection; for income years commencing on or after January 1, 1999, and prior to January 1, 2000, "net income" means fifty-five per cent of the
amount computed under subdivision (1) of this subsection; for income years commencing on or after January 1, 2000, and prior to January 1, 2001, "net income" means thirty
per cent of the amount computed under subdivision (1) of this subsection; for income
years commencing on or after January 1, 2001, net income of S corporations as computed
under subdivision (1) of this subsection shall not be subject to the tax under this chapter.
Any S corporation subject to the tax on net income as provided in this section shall be
eligible for any credit against the tax otherwise available to taxpayers under this chapter
only to the extent and in the same percentage as net income of such S corporation is
subject to taxation under this chapter, except that any S corporation with an income year
commencing on or after January 1, 1999, but before December 31, 2000, shall be eligible
for the entire credit available under sections 8-395, 12-633, 12-634, 12-635 and 12-635a.
(d) The commissioner may adopt regulations in accordance with chapter 54, relating
to mergers or consolidations of corporations providing for the deduction, by the surviving or new corporation provided for in the plan of consolidation, of operating losses
that were incurred by a merging or consolidating corporation, respectively, before the
merger or consolidation, respectively. Such regulations may follow the provisions of
the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue
code of the United States, as from time to time amended, or the regulations thereunder.
(1949 Rev., S. 1898; 1949, S. 1093d; 1957, P.A. 560, S. 8; 1961, P.A. 428, S. 2; 1963, P.A. 651, S. 1; 1971, P.A. 461;
June, 1971, P.A. 8, S. 28; 1972, P.A. 285, S. 12; P.A. 73-350, S. 8, 27; P.A. 77-16, S. 1, 2; 77-550, S. 1, 2; P.A. 80-483,
S. 55, 186; P.A. 81-66, S. 1, 5; 81-245, S. 2, 4; 81-411, S. 1, 42; Nov. Sp. Sess. P.A. 81-7, S. 1, 3; P.A. 85-159, S. 1, 19;
85-469, S. 4, 6; P.A. 89-211, S. 23; 89-251, S. 22, 203; June Sp. Sess. P.A. 91-3, S. 100, 168; P.A. 93-74, S. 6, 67; 93-332, S. 9, 12, 42; 93-435, S. 64, 95; P.A. 96-175, S. 1, 5; 96-197, S. 4, 11; P.A. 97-119, S. 1, 2; 97-283, S. 1, 2; P.A. 99-83, S. 1, 2; 99-173, S. 39, 65; 99-235, S. 5, 7; P.A. 00-170, S. 24, 42; May 9 Sp. Sess. P.A. 02-1, S. 56.)
History: 1961 act added Subdiv. (2); 1963 act extended exception in Subdiv. (2) to all taxpayers for year 1963 and
thereafter; 1971 acts added provisions applicable to taxpayers whose income reported in consolidated return and changed
2.5% rate to 60% for banking institutions beginning in 1971 income year, deleting obsolete reference to January 1, 1962;
1972 act deleted mutual banks and trust companies in Subdiv. (2), included building and loan associations and increased
60% interest by 10% each year beginning in 1973 until 100% level reached; P.A. 73-350 changed 5% rate for other taxpayers
to 90% in 1973 and 100% thereafter, added provisions re operating losses and net capital losses, added phrase re taxpayers
who file as part of consolidated return with federal government but not with the state and added provision clarifying
applicability of provisions to life insurance companies; P.A. 77-16 added provisions specially applicable to regulated
investment companies, effective March 29, 1977, and applicable to income years commencing on and after January 1,
1977; P.A. 77-550 added provisions calling for consideration of excess of deductions allocated and apportioned to state
under Sec. 12-218 as operating loss; P.A. 80-483 made technical changes; P.A. 81-66 eliminated Connecticut corporation
business tax paid in the income year as a deduction from gross income in determining taxable income under said tax,
effective May 4, 1981, and applicable to income years commencing on or after January 1, 1981; P.A. 81-245 added a
deduction for the gross income attributable to an international banking facility, provided no expense or loss attributable
to such facility shall be a deduction, effective upon adoption by the Board of Governors of the Federal Reserve System of
amendments to Regulations D and Q pertaining to international banking facilities (adopted June 9, 1981, with an effective
date of December 3, 1981); P.A. 81-411 allowed dividends received to be deducted from gross income and provided that
net income be apportioned only, eliminating references to allocation, effective June 18, 1981, and applicable to income
years commencing on or after December 28, 1980; Nov. Sp. Sess. P.A. 81-7 amended section to permit deductions for
depreciation, adding Subpara. (2) of Subdiv. (1) in previously existing provisions designated as Subsec. (a) and Subsec.
(b) detailing such deductions, effective January 27, 1982, and applicable to corporations' income years commencing on
or after January 1, 1981; P.A. 85-159 provided for a depreciation deduction for income years commencing in 1985 of 88%
of the amount of the deduction allowed for federal income tax purposes; P.A. 85-469 revised effective date of P.A. 85-159 but without affecting this section; P.A. 89-211 clarified reference to the Internal Revenue Code of 1986; P.A. 89-251
amended Subsec. (a) by adding to the list of items deductible from gross income in determining net income under the
federal income tax which may not be so deducted for purposes of the Connecticut tax on net income of corporations, the
following: Taxes in any state or political subdivision thereof imposed on or measured by the income or profits of a corporation, effective July 1, 1989, and applicable to income years commencing on or after January 1, 1989; June Sp. Sess. P.A.
91-3 amended Subsec. (b) to provide for the nondeductibility of 30% of dividends received from a domestic corporation
in which the taxpayer owns less than 20% of the total voting power and value of the stock of such corporation and
added Subsec. (c) concerning net income of S corporations, effective August 22, 1991, and applicable to income years of
corporations commencing on or after January 1, 1991; P.A. 93-74 specified that with respect to nonlife insurance companies
the unpaid loss reserve adjustment shall not be made, effective May 19, 1993, and applicable to taxable years commencing
on or after January 1, 1993; P.A. 93-332 made technical change in language added in Sec. 6 of P.A. 93-74 to specify that
with respect to nonlife insurance companies the unpaid loss reserve adjustment shall not be made and amended Subsec.
(c) to prohibit any separate state adjustment to the net income of an S corporation with respect to the compensation of any
officer or employee, effective June 25, 1993, and applicable to taxable years on or after January 1, 1993; P.A. 93-435 made
a technical change in Subsec. (a), effective June 28, 1993; P.A. 96-175 amended Subsec. (c) by adding Subdiv. (2) re
phase-out of net income, effective May 31, 1996, and applicable to income years commencing on or after January 1, 1997;
P.A. 96-197 added Subsec. (d) to permit commissioner to adopt regulations relating to mergers and consolidations, effective
June 3, 1996, and applicable to income years commencing on or after January 1, 1996; P.A. 97-119 added Subsec. (a)(3)
re real estate investment trusts and made technical and renumbering changes, effective June 6, 1997, and applicable to
income years commencing on or after January 1, 1997; P.A. 97-283 amended Subsec. (c) to make any S corporation subject
to tax on net income eligible for credits against tax in the same percentage as net income subject to tax under chapter,
effective June 26, 1997, and applicable to income years commencing on or after January 1, 1997; P.A. 99-83 amended
Subsec. (c) to add exception for S corporations with income year commencing on or after January 1, 1999, but prior to
December 31, 2000, effective June 3, 1999, and applicable to income years commencing on or after January 1, 1999; P.A.
99-173 amended Subsec. (a) to extend the net operating loss carry forward provision from five to twenty years applicable
to losses incurred on or after January 1, 2000, and provide a deduction for gains realized from sale of open space land,
effective June 23, 1999, and applicable to income years commencing on or after January 1, 1999; P.A. 99-235 amended
Subsec. (a)(1)(E) to replace "watershed" with "water company", effective June 29, 1999; P.A. 00-170 amended Subsec.
(c) to allow S corporations to be eligible for credits under Sec. 8-395 for income years commencing on and after January
1, 1999, but before December 31, 2000, effective May 26, 2000, and applicable to income years commencing on or after
January 1, 2000; May 9 Sp. Sess. P.A. 02-1 amended Subsec. (b) to delete former Subdivs. (1) and (2) and provide for a
depreciation deduction to be determined as provided under the Internal Revenue Code, except that Section 168(k) of said
code shall not apply, effective July 1, 2002, and applicable to property placed in service after September 10, 2001, in
income years ending after said date.
Statute should be construed so as to avoid double taxation. 122 C. 553. Under former exception, rent received from
subtenants may not be deducted from gross rent to determine rent paid. 127 C. 507. Taxes paid by lessee under terms of lease
on property leased held within former exception and not deductible; payment made for "other services" under agreement by
which corporation rented machines could not be treated as rent. 129 C. 663. "Items deductible under federal corporation
net income tax law" do not include "credits" of sums taxable under federal law; federal excise profits net income not
deductible in determining income subject to state business tax. 130 C. 460. Cited. 135 C. 57. Incorporation of federal law
by reference into state law is not a delegation of legislative power. 142 C. 483. Cited. 178 C. 243. Cited. 179 C. 363. Cited.
196 C. 1. Implications of a taxpayer's federal election on his privilege to claim deductions under state statutes discussed.
199 C. 346. Cited. 203 C. 198. "... does not authorize surviving corporation to deduct operating loss carry-overs of the
merged or consolidated corporations ...". 203 C. 455. Cited. 213 C. 220; Id., 442. Cited. 220 C. 665. Cited. 235 C. 865.
Cited. 2 CA 660.
Cited. 40 CS 77. Cited. 43 CS 260. Cited. 44 CS 90; Id., 377. Surviving corporation may deduct an operating loss carry
over of a merged or consolidated corporation if "continuity of business test" is met. 45 CS 202.
Subsec. (a):
Where election made to take federal tax credit, wages at issue in case are no longer "items deductible under federal
corporation net income tax" for purposes of this section. 213 C. 442. Subdiv. (A) cited. 236 C. 156. Subdiv. (D) cited. Id.