Connecticut Pass-Through Entity Tax: Who Should Elect It and How It Works
Connecticut Pass-Through Entity Tax: Who Should Elect It and How It Works
If your business is an LLC taxed as a partnership or an S corporation, the Connecticut pass-through entity tax (the PET) is one of the first state tax questions your CPA will raise. It is optional, it is decided one year at a time, and it changes who pays Connecticut income tax on the business profit. This guide covers what the PET is, who is eligible, how the entity tax and owner credit work, and how to make the election.
Disclaimer: This guide is informational only. It is not legal or tax advice. Whether the PET makes sense depends on your entity type, federal tax classification, owner residency, and income. Talk with a qualified CPA before you elect, and with an attorney if your ownership structure is complicated.
What the Connecticut pass-through entity tax is
The PET lets a partnership or S corporation pay Connecticut income tax at the entity level, on income that would otherwise pass through to the owners and be taxed on their personal returns. The entity files Form CT-PET and pays the tax. Each owner then receives a credit on their own Connecticut return for most of the tax allocated to them.
Two points cause the most confusion. First, the PET is optional. It was mandatory for tax years 2018 through 2023, and many vendor and accounting pages still describe it that way. For current years, you choose whether to elect. Second, the election applies to one year at a time. An entity that elects for one year is not locked in permanently, but an election for a given year is irrevocable for that year.
Who can elect it
Two kinds of entities can elect the PET:
- Partnerships, including LLCs taxed as partnerships for federal income tax purposes. A multi-member LLC that has not elected to be taxed as a corporation typically falls in this group, but confirm your federal classification with your CPA.
- S corporations.
Several common structures do not qualify:
- C corporations pay Connecticut's Corporation Business Tax instead. That tax is 7.5% of apportioned net income with a $250 minimum, plus a capital base tax that is being phased out (0.16% for 2026, 0.11% for 2027, none from 2028, CGS 12-219), plus a 10% surtax for companies with total income of $100 million or more or that file in a combined unitary group.
- LLCs taxed as corporations follow the same Corporation Business Tax rules as C corporations.
- Single-member LLCs that are disregarded for federal tax purposes report their income on the owner's return and are not partnerships, so the PET election is generally not available to them. Confirm this with your CPA.
Forming the entity comes first, and the PET decision does not change those filings. An LLC is formed by filing a Certificate of Organization with the Connecticut Secretary of the State through Business.CT.gov, with a $120 filing fee, and it files an Annual Report every year at $80.
How the tax and the owner credit work
The PET rate is 6.99% of the entity's income subject to tax. The 2024 CT-PET instructions explain how that income is determined. Tax rules can change from year to year, so check the instructions for the year you are filing.
The owner side works through a credit. Each owner receives a credit equal to 87.5% of the PE tax allocated to them. The owner claims the credit on Schedule CT-PE, filed with their Connecticut personal income tax return, using the figures reported on their Schedule CT K-1. Owners need the K-1 from the entity before they can complete their personal return.
A simplified example
The numbers below are hypothetical. They show the arithmetic only, using the 6.99% rate and 87.5% credit from the 2024 instructions. They do not account for your actual income, adjustments, apportionment, or the current year's rules.
| Item | Amount |
|---|---|
| Entity income subject to tax (hypothetical) | $200,000 |
| PET at 6.99% | $13,980 |
| One owner's 50% allocation of the PE tax | $6,990 |
| Credit at 87.5% of that allocation | $6,116.25 |
| Portion of that allocation not offset by the credit | $873.75 |
In this simplified math, the credit returns most of the tax, and $873.75 of this owner's allocation is not offset. That is not yet the comparison that matters. The right test is whether the PET costs less than what each owner would pay on the same income at their own personal Connecticut rates, which run from 2% to 6.99%, after accounting for the federal effect described below. Also confirm whether the credit is limited by an owner's personal tax in your situation, and how it works for owners who live outside Connecticut.
The federal side: why many owners elect
The main reason owners elect the PET is federal. Because the entity pays the tax, the payment reduces the business income that flows to the owners, rather than being a personal state tax deduction on each owner's return. For owners who are limited by the federal cap on state and local tax deductions for individuals, this structure can recover part of the deduction they would otherwise lose. The federal treatment of pass-through entity taxes has been addressed by IRS guidance and has changed over time, so have your CPA confirm how the PET is treated on your federal return for the year.
Who should consider electing
The PET is worth modeling if most of the following are true:
- The entity is a partnership or S corporation with meaningful Connecticut income.
- The owners are Connecticut residents who pay significant personal Connecticut income tax.
- The owners have state and local taxes that are limited on their federal returns, so the entity-level deduction matters.
- The business can cover the cash flow, including estimated payments.
- A side-by-side comparison prepared with your CPA shows a net benefit after the federal effect.
Be cautious if most of your owners are nonresidents, if your income is low, or if your owners are in lower brackets and have no federal cap issue. Each of those situations can reduce the benefit or eliminate it. Check with the Department of Revenue Services and your CPA on how nonresident owners use the credit before you assume it works for them.
How to make the election
- Confirm eligibility. Confirm that the entity is a partnership or S corporation for federal purposes.
- Model the year. Compare the PET with the owners' personal Connecticut tax, including the federal effect, before the year closes. Have your CPA prepare the comparison.
- Check the election box. Check the PET election box on a timely filed Form CT-1065 (partnerships) or Form CT-1120SI (S corporations). The election is made each year and is irrevocable for that year.
- File Form CT-PET. For calendar-year entities, Form CT-PET is due March 15.
- Make estimated payments. When the required annual payment is $1,000 or more, the PET is paid in four installments. Confirm the installment due dates with the Department of Revenue Services, because this guide does not list them.
- Issue Schedule CT K-1s. Give each owner the PE tax figures they need to claim the credit.
- Owners claim the credit. Each owner completes Schedule CT-PE with their Connecticut personal income tax return.
Common mistakes
- Relying on outdated pages. Older pages that call the PET mandatory describe the 2018 through 2023 rules, not current law.
- Treating the election as permanent. The election is made each year, so revisit the decision annually.
- Assuming the credit eliminates the tax. The credit returns most of the tax, not all of it, and its use depends on each owner's situation.
- Missing estimated payments. A required annual payment of $1,000 or more triggers the installment schedule.
- Forgetting the K-1. Owners cannot claim the credit without the figures from Schedule CT K-1.
- Using a rule of thumb. The result depends on each owner's income, residency, and federal position, so a general rule rarely settles the question.
Questions to bring to your CPA
- Is my entity eligible, given how it is classified for federal tax?
- How does the PET compare with my owners' personal Connecticut tax, after the federal effect?
- Do any owners live outside Connecticut, and how does the credit work for them?
- Is the credit limited in my situation?
- What are the estimated payment due dates for my entity?
- Does the current year's CT-PET instruction change the rate, the income base, or the credit?
Official resources
- Connecticut Department of Revenue Services: https://portal.ct.gov/drs (search the site for the pass-through entity tax page and the current CT-PET instructions)
- Connecticut Secretary of the State, Business Services Division: https://portal.ct.gov/sots/business-services/bsd (entity filings and the Annual Report)
- Business.CT.gov business forms and fees: https://business.ct.gov/business-services/business-forms-and-fees
- Connecticut Small Business Development Center: https://ctsbdc.uconn.edu/
The PET is one of the few Connecticut tax choices that can change a pass-through owner's bottom line in a single year. Model the numbers early, and make the decision with your CPA before the return is due.