By: Dan M. Smolnik

On July 6, 2020, the Department of Revenue Service (“DRS”) released initial guidance, in a Q&A format, addressing some of the issues concerning the impact of the federal Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, on interpretation of Connecticut tax law. These notes provide a summary of some of the more important issues reviewed in the guidance.

Individual Income Tax

DRS observes that, because calculation of Connecticut state income tax begins with the individual’s federal adjusted gross income (“AGI”), which is then subjected to certain state law modifications to arrive at Connecticut adjusted gross income, and the federal economic impact payments are excluded from federal adjusted gross income, they are, therefore, not included in Connecticut adjusted gross income and not subject to Connecticut income tax.

Coronavirus Related Distributions from Qualified Retirement Accounts

Likewise, Connecticut law includes no modifications to include coronavirus-related distributions from qualified retirement accounts. Hence, insofar as federal law includes or excludes such distributions in or from income, Connecticut tax law will do the same.

Coronavirus-related distributions from a qualified retirement account, as allowed under the CARES Act, are, however, subject to the statutory 6.99% withholding unless the recipient submits a Form CT-W4P to the payor requesting that no or a lesser amount of Connecticut income tax be withheld.

Inclusion in Income of Loans Forgiven in Business or Individual Income Tax

Loans forgiven under the CARES Act Paycheck Protection Program are excluded from AGI under federal law. Because Connecticut law includes no modification of the federal treatment of AGI for state tax purposes with regard to PPP loan forgiveness, such forgiven loans are not included in Connecticut AGI for either individual income tax or corporation business tax purposes.

State Law Effects of CARES Act NOL Provisions


Connecticut corporation business taxes are not affected by the federal carryforward and carryback rules.


The carryback of federal net operating losses that affect an individual’s state tax liability must be done consistent with the 2014 Connecticut Superior Court opinion of Adams v. Sullivan. In that case, the court held that, because Connecticut law makes no provision for individual taxpayers to deduct federal Net Operating Losses (“NOLs”) from Connecticut AGI, those NOLs may offset Connecticut AGI for a given year only to the extent the taxpayer used those NOLs to offset federal AGI for that year. These NOLs are also subject to C.G.S. §12-727(b) (generally requiring that taxpayers filing a federal amended tax return also file with DRS a corresponding Connecticut tax return).

Note that individuals with a Connecticut source loss but with no corresponding federal loss are not affected by the NOL treatment changes of the CARES Act. Such individuals are still required to comply with Connecticut Regulation §12-711(b)(6).

Business Loss Limitation

The Tax Cuts and Jobs Act (P.L. 115-97) created a new Section l in Code Section 461. This section, among other things, disallows business losses of noncorporate taxpayers in excess of $250,000 ($500,000 for joint filers).  This threshold is subject to indexing for inflation.  Any amount disallowed is carried forward to the next tax year. This provision sunsets on December 31, 2025.

The CARES Act, however, repeals the excess business loss limitation for tax years 2018, 2019, and 2020. The Act also provides two additional important revisions to the law:

  • NOLs incurred in a year beginning after December 31, 2017 and before January 1, 2021 can be carried back for up to five years preceding the year in which the loss was incurred and
  • The CARES Act suspended the rule limiting NOL utilization to 80% of taxable income for tax years beginning before January 1, 2021

Because Connecticut law provides no specific statutory modifications to the excess business loss limitation, that calculation is applied to federal adjusted gross income calculations and thence to Connecticut AGI calculations under applicable state law.

The Department of Revenue Services is likely to update its guidance on this issue as more information becomes available.

These notes are intended only to review general principles and are not intended as legal or tax advice. The reader is encouraged to discuss his or her specific circumstances with a qualified professional before taking any action.

Tags: Tax