Conn. Agencies Regs. § 12-708-8

Current through December 27, 2024

Section 12-708-8 - Change other than from accrual to installment method of accounting

(a) If a person's method of accounting is changed, other than from an accrual to an installment method, there shall be taken into account in computing Connecticut taxable income from the taxable year of the change those adjustments pertaining to inventories, accounts receivable, accounts payable, etc., which are determined to be necessary to prevent amounts from being duplicated or omitted. If the change has occurred by reason of a change in the person's federal method of accounting, such adjustments shall generally be reflected in federal adjusted gross income and therefore in Connecticut adjusted gross income for the year of the change. The "year of the change" is the taxable year for which the taxable income of the person is computed under a method of accounting different from that used for the preceding year.

(b) The adjustments necessitated by reason of such change in accounting method may result in an amount of Connecticut income tax for the year of the change in excess of the Connecticut income tax which would have been determined had there not been such a change in the method of accounting. In such event, the additional Connecticut income tax shall not be greater than if such adjustments were ratably attributed to and included for the taxable year of the change and the preceding taxable years, not in excess of two, during which the person used the prior method of accounting.

(c) A statement shall be submitted with the Connecticut income tax return for the year of the change, setting forth the following information and calculations:

(1) each adjustment necessitated by the change;

(2) the net amount of the adjustments. This means the consolidation of the adjustments (whether the amounts thereof represent increases or decreases in items of income or deduction) arising with respect to balances in various accounts at the beginning of the taxable year of the change. Where the change in the method of accounting occurs by reason of a federal change, this net amount shall be the same for Connecticut income tax purposes as it is for federal income tax purposes, except to the extent of any modifications described in §§ 12-701(a)(20)-2 and 12-701(a)(20)-3 of Part I and §§ 12-701(a)(10)-2 and 12-701(a)(10)-3 of Part IV;

(3) the Connecticut income tax for the taxable year of the change with the net amount of adjustments included in the computation of Connecticut taxable income;

(4) the Connecticut income tax for the taxable year of the change computed as if the net amount of such adjustments were not included in the computation of Connecticut taxable income;

(5) the amount (but not less than zero) of any additional Connecticut income tax for the taxable year of the change, incurred solely by reason of the net amount of adjustments included in Connecticut taxable income, computed by subtracting the amount computed in subdivision (4) from the amount computed in subdivision (3) of this subsection;

(6) the allocation of the net amount of adjustments (subdivision (2) of this subsection) to the taxable year of the change and the preceding taxable year or years, not in excess of two, during which the person used the method of accounting from which the change is made. The amount to be allocated to each such year is determined by dividing the net amount of adjustments into as many equal parts as there are taxable years involved (either two or three taxable years, including the taxable year of the change);

(7) the Connecticut taxable income for the taxable year of the change and for the preceding taxable year(s), as the case may be, computed both (A) without any amount of the net adjustments, and (B) with the addition of the appropriate share of the net adjustments as determined under subdivision (6) of this subsection;

(8) the additional Connecticut income tax which would result for each of the above taxable years by the addition to the Connecticut taxable income in each such year of the appropriate share of the net adjustments; and

(9) the total amount of such additional Connecticut income tax for the years involved.

(d) If the amount described in subdivision (c)(9) of this section exceeds the amount described in subdivision (c)(5), the person shall compute Connecticut income tax for the year of the change without a ratable attribution of the net adjustments to any preceding year or years. If the amount described in subdivision (c)(5) exceeds the amount described in subdivision (c)(9), the amount of the excess shall be subtracted from the Connecticut income tax for the year of the change as determined under subdivision (c)(3) of this section. The result is the amount of Connecticut income tax due for the taxable year of the change.

Example:Assume that a resident individual used the cash method of accounting in 1992 and 1993. Assume also that the effective tax rate for this individual is 3.75% for 1992, 4.0% for 1993 and 4.5% for 1994. In 1994 the individual changes to the accrual basis and has Connecticut taxable income of $10,000 figured on the accrual basis. Her books at the beginning of 1994 included the following accounts: accounts receivable $9,000; accounts payable $8,000; inventory of $5,000. The amount of Connecticut income tax due for the taxable year of the change is computed as follows:

Subject to the amount of any modifications required under the Income Tax Act, the Connecticut taxable income for the year of the change, including the net amount of adjustments (see subdivisions (c)(1) and (2) of this section), would be $16,000, computed as follows:

Connecticut taxable income on accrual basis(new method but before adjustments) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$10,000
(1) Adjustments: Add items notpreviously reported as income:
Accounts receivable January 1, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9,000
Items previously deducted but constitutingmarketable business
assets: Inventory January 1, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5,000
Total to be added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$14,000
Subtract items not previouslydeducted:
Accounts payable January 1, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8,000
(2) Net amount of adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 6,000
Connecticut taxable income after adjustments . . . . . . . . . . . . . . . . . . . . . .	$16,000

The net additional Connecticut income tax for the year of the change described in subdivision (c)(5) of this section is computed as follows:

(3) Connecticut income tax due on Connecticut taxable income for the year of the change, including the net amount of adjustments ($16,000 × 4.5%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 720
(4) Connecticut income tax due on Connecticut taxable income for taxable year of change, excluding adjustments ($10,000 x 4.5%)	$ 450
(5) Net additional Connecticut income tax due . . . . . . . . . . . . . . . . . . . . .	$ 270

Because the taxpayer used the cash method for the two years preceding the year of the change and the adjustments of 1994 increased Connecticut taxable income by $6,000, she may reduce the Connecticut income tax on the increase by attributing $2,000 to 1992, $2,000 to 1993 and $2,000 to 1994 (see subdivisions (c)(6) through (8) of this section). The net Connecticut income tax due for the year of change is then computed as follows:

Taxable year	Conn. income before adjstmts.	Conn. income after adjstmts	Connecticut income tax before adjstmts	Connecticut income tax after adjstmts	Increase in Connecticut income tax due to adjstmts
1992	$ 6,000	$ 8,000	$225	$300	$75
1993	6,500	8,500	260	340	80
1994	10,000	12,000	450	540	90

Total increase in Connecticut income tax attributable to adjustment (see subdivision (c)(9) of this section) . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .	$ 245
Net additional Connecticut income tax determined at subdivision (5) of this subsection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	270
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Total Connecticut income tax for year of change determined at subdivision (3) of this subsection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 720
Excess shown above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Connecticut income tax due for a year of change . . . . . . . . . . . . . . . . . . . .	$ 695

Conn. Agencies Regs. § 12-708-8

Effective November 18, 1994